Fin433, Sec:1

MD. Tahmid Abdullah Nafim, 1711451630

Chapter 13
a) Investors can protect their portfolios by selling index futures on the underlying
investments that reflect the securities in the investor’s portfolio. By selling futures on
indexes, they protect against a temporary decline in values of their securities. Yet, they
did not need to sell these securities. Thus, institutional investors can protect their
portfolios without major sell-offs of their securities, which may prevent large declines in
the prices of their securities.

b) Stock index futures may be purchased by portfolio managers along with other stocks. The
futures require only a small initial investment, and yet the value can change substantially.
There is much leverage in futures but the investors don’t have to purchase the index itself
when they take a futures position the way they would with stocks. Instead, they only
invest the initial margin, but stand to incur large gains or losses when the futures
contracts are closed out. As a result of this leverage, the gains or losses are elevated more
than if the manager simply used their funds to purchase stock.

c) A portfolio manager can sell futures contracts on euros to hedge German stock
investments. If the euro devalues against the dollar, the market value of the portfolio is
reduced. However, there would be a gain on the futures position, which could help offset
the bad effect on the stock portfolio.

Chapter 14
a) In past recent years, watchers in the market had little to write about, what they managed
to write in their firm is only passing of stock-index milestone after another, the occasion
of hitting of their firm shaken the financial world awake. Commentators have been quick
to pull out the cliches, that the stock market is not the economy,and that stocks have
predicted nine out of the past five recessions.
b) Capitalization weighting is one of the most common argument in the investors; this holds
a capitalization-weighted portfolio index. Then it gives an average return for all
investors; if some investors do worse, other investors must do better for the most
investors use modern portfolio theory for allocation determination. These investors
understand that they can get a better result because other investors are not very good. The
practical conclusion is that using capitalization-weighted portfolios is not necessarily the
optimal method, investor getting most appropriate index enables this.
c) Intensifying the stock portfolio income by writing options such as extracting the appeal
of covered-call investing. Like when one buying cherry at $30, say, and write a
November call exercisable at $66. Now if apple does not up so much, option expires
unexercised, and you pocket the $10 premium. If it does not shoot up, one has a$14
capital gain from your stock portfolio plus $10 hence it appears like a win. Call option
income lowers the volatility of a portfolio since it offsets capital losses in a down market.
Looks like finding money on the street.