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RSB [31]
2 years ago
6

You own a portfolio which is valued at $8.5 million and which has a beta of 1.3. You would like to create a riskless portfolio b

y hedging with S&P 500 futures contracts. The contract size is $250 times the index level. How many futures contracts do you need to acquire if the current S&P 500 index is 1310? Select one: a. Short 41 contracts b. Short 28 contracts c. Short 34 contracts d. Long 28 contracts e. Long 34 contracts
Business
1 answer:
Stells [14]2 years ago
8 0

Answer:

The answer is option (c)  Short 34 contracts

Explanation:

Solution:

Given that

The information about the portfolio is as stated below:

The value of the portfolio = $8.5 million

The beta = 1.3

The future contract of S&P price = $1310

The size of contract  = 250

Now,

To hedge the risk completely, the desired beta is =0

Thus,

The number of contracts is calculated as follows:

The Number of contract = (desired beta - portfolio beta)*portfolio value/(future price*contract size)

So,

The number of contracts = (0 - 1.3)*8500000/(1310*250) = -34

Then,

The negative sign means  it is going short.

Hence,

A total of 340 contracts must be short.

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