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Strategies & Market Trends : Bonds, Currencies, Commodities and Index Futures
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To: fswep who wrote (1247)2/20/2001 3:11:28 PM
From: John Pitera  Read Replies (1) of 12410
 
Hi Ward,

It sounds like they are giving you pretty broad latitude to come up with something creative, or
are their more background conditions and/or restrictions to this experiment?

If not take a stock like CSCO, then construct the size of you're futures contract say 10,000 shares, have
the stock futures contract espire every 3 months March, June, Sept, Dec.

the futures contract will trade a a premium that will contract over the life of the contract as you get closer
to settlement. since the margin of the contract will be say 14,000. the balance of the 280K (assuming a price
of 28 for CSCO) 280,000-14,000 = 266,000 will be able to earn a 3 month tbill "risk free" rate of return of
5.04% today. so the futures price series will start above the price that CSCO trades from moment to moment
and then premium will diminish over the course of the 90 days until the futures prices measures the
4 pm closing price of CSCO at the end of the 3rd friday on expiration month.

you could go on and show how firms could establish plans to arbitrage the futures price of the CSCO contract
if it deviates beyond a specific standard deviation of fair value. Maybe throw in a linear regression of
CSCO's implied volatility, and talk about liquidity issues.

the tax implications are really profound as it'll be much easier to create long-term capital gains in stocks, while
be able to hedge against shorter term moves. options are bulky from that perspective.

as for tax implications try the research at levy.org

levy.org

and for accounting why not hit up FASB??

rutgers.edu

they're always full of fun and games for the whole family :-)

John
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