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Running Head: PORTFOLIO ASSET MANAGEMENT – DERIVATIVES 1
MANAGING PORTFOLIO BY ASSET MANAGER
- USING FUTURES, OPTIONS, INTEREST RATE AND CREDIT RISK SWAPS
PORTFOLIO ASSET MANAGEMENT- DERIVATIVES 2

List of References:
1. www.eurexchange.com
2. http://markets.ft.com/research/Markets/Currencies
3. http://markets.ft.com/research/Markets/Bonds
4. http://www.cmegroup.com
http://www.eurexchange.com/
http://markets.ft.com/research/Markets/Currencies
http://markets.ft.com/research/Markets/Bonds
http://www.cmegroup.com/
PORTFOLIO ASSET MANAGEMENT- DERIVATIVES 3

Solution:
1. In order to be fully hedge, Asset Manager should sell the Bonds Future and Equities
Futures.
Computation of the No. of EURO- BTP Futures to be sold:
BTP Italian 10 Year Securities Held = Euro 2,000,000
As per www.eurexchange.com opening price on Aug 23, 2013 for Long Term Euro –
BTP Futures (FBTP) is Euro 112.32
No. of Bonds in a Future Contract = 1000
No. of EURO BTP Futures to be short/ sold = Euro 2,000,000/ (Euro112.32*1,000)
No. of EURO BTP Futures to be short/sold = 17.81 Contracts i.e. 18 Contracts (as
fractional contracts are not available)
Comments: Short Selling the future EURO BTP would hedge the Bonds against the
Interest Rate Risk. However as per the assertions of the Asset Manager market is to move
in such a way that Yield on Bonds will increase. In such a market , Asset Manager should
sell future bonds so as to gain the opportunity of Yield Increase
Computation of the No. of German DAX Index to be sold:
http://www.eurexchange.com/
PORTFOLIO ASSET MANAGEMENT- DERIVATIVES 4

German Equity Securities Held = Euro 50,000,000
As per www.eurexchange.com opening price on Aug 23, 2013 for DAX Futures (FDAX)
is Euro 8,418
No. of Units in a Future Contract = 25
No.of German DAX Index Futures to be short/sold = Euro 50,000,000/ (Euro8418*25)
No. of German DAX Index Futures to be short/sold = 237.59 Contracts i.e. 238
Contracts (as fractional contracts are not available)
Comments: As per the assertions, the Stock Markets are to fall. In such scenario it would
be advisable for the Fund Manager to short sell the DAX Stock Index future so as to
hedge against non-favorable movements.
http://www.eurexchange.com/
PORTFOLIO ASSET MANAGEMENT- DERIVATIVES 5

2. Interest rate swaps have two major risks:
a. Interest Rate Risk: Interest Rates sometimes do not move the same way as
expected. Suppose in our case as we are fixed...