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sammy [17]
3 years ago
7

You are given the following information about a portfolio you are to manage. For the long term, you are bullish, but you think t

he market may fall over the next month. Portfolio Value $ 1 million Portfolio's Beta 0.60 Current S&P500 Value 1400 Anticipated S&P500 Value 1200 How many contracts should you buy or sell to hedge your position? Allow fractions of contracts in your answer. sell 11.235 buy 1.714 buy 4.236 sell 4.236 sell 1.714
Business
1 answer:
Ira Lisetskai [31]3 years ago
3 0

Answer:

sell 1.714

Explanation:

The computation of the number of contract buy or sold to hedge the position is shown below:

As we know that

Number of contracts = Hedge Ratio    

Hedge Ratio = Change in Portfolio Value ÷ Profit on one future contract

where,

Change in the value of the portfolio is

For that we need to do following calculations

Expected Drop in Index is

= (1200 - 1400) ÷ 1400    

= -14.29%    

And, Expected Loss on the portfolio is

= Beta × Expected index drop

= 0.60 × (-14.29%)    

= -8.57%    

So, the change is

= 1000000 × (-8.57%)

= -$85,700  

And, the profit is

= 200 × 250 multiplier

= 50,000

So, the hedging position is

= -$85,700 ÷ 50,000      

= -1.714  

This reflects the selling position

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