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RSB [31]
3 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]3 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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Communication skills refer to a manager’s ability to effectively convey ideas and information to others and to effectively receive ideas and information from others. This exercise focuses on communication skills as they involve deciding how to best convey information to others.

Exercise Background

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