Question 1

MPF has indicated interest in international investments in equity securities and has requested VAM to consider the different equity markets. VAM has indicated that the risk of interenational investments can be hedged using different derivative contracts. These may include use of exchange-traded derivatives and over the counter (OTC) contracts. VAM has identified Chicago Board of Options Exchange (CBOE) and the CME Group for trading options and futures respectively for managing risk of MPF’s potential investment portfolio. However, the Intercontinental Exchange (ICE) also trades options and futures and is considered an alternative to both CBOE and CME.

Required:

Compare the MSCI US Index Futures contract on ICE against the S&P500 Futures on the CME as well as the equity options on Apple listed on CBOE against the equity options on BT Group Plc listed on ICE. (8 marks)

Analyse the main relevant features of futures and options that determine whether futures or options contracts will be used. (7 marks)

Evaluate and recommend which futures and options contracts listed on ICE, CME and CBOE markets should be used in the context of MPF’s proposed investment. (10 marks)