Answer:
1. According to the given data, he should be short the index contracts. In the event of stock value falling, he gets future profits to offset the loss from the falling price of the equity
2. You should enter into 42 contracts
3. You should enter into 21 contracts
Explanation:
1. According to the given data, he should be short the index contracts. In the event of stock value falling, he gets future profits to offset the loss from the falling price of the equity.
2. To calculate how many contracts should you enter, first we need to calculate the number of contracts required to hedge the portofolio as follows:
number of contracts required to hedge the portofolio as follows=$250×1,286
number of contracts required to hedge the portofolio as follows=$321,500
Therefore, number of contracts to hedge= portfolio worth/Each contract worth
number of contracts to hedge=$13.800.000/$321,500
number of contracts to hedge=42
You should enter into 42 contracts
3. If you decide to reduce portfolio beta to 0.5 the index futures contracts should you enter into is calculated as follows:
number of contracts to hedge= (portfolio worth/Each contract worth)×beta
number of contracts to hedge=($13.800.000/$321,500)×0.5
number of contracts to hedge=21
You should enter into 21 contracts
