Beginner Question

Discussion in 'Index Futures' started by xbsd, Jul 5, 2010.

  1. xbsd



    I am preparing for CMT, and one of the chapters in the Maggee book on Technical Analysis discusses about Futures Trading, that has puzzled me since the morning. Hoping someone can shed some light --

    Excerpt --

    "You have $400,000 in the Dow and $100,000 in money market instruments. You decide to reverse this ratio. But you don’t want to liquidate the Dow portfolio, as there is no sign of a confirmed downtrend, only that of consolidation. So you sell $300,000 of index futures, leaving yourself with a $100,000 kicker in case you are wrong about the market’s declining. At the time, the market is 10000 and the futures are 10500, meaning the cost of carry is approximately 0.5% (10,500/10,000 – 1).

    You sell three futures contracts ($300,000/($10⋅10,000)). You now have reversed your position and are long $100,000 Dow stocks and long $400,000 money market equivalents."

    -- My question is, if Futures are trading at 10500, how can I Short 3 Futures contract at the current index value of 10000 ?

    In the second paragraph, the author calculates that each Future Contract will cost $ 100,000 if DOW = 10000. I'd have thought this would be 105,000 ?

    What am I missing ?