Janice Delsing, a U.S.-based portfolio manager, manages an $800 million portfolio

($600 million in stocks and $200 million in bonds). In reaction to anticipated shortterm market events, Delsing wishes to adjust the allocation to 50 percent stocks and 50 percent bonds through the use of futures. Her position will be held only until “the time is right to restore the original asset allocation.” Delsing determines a financial futuresbased asset allocation strategy is appropriate. The stock futures index multiplier is

$250 and the denomination of the bond futures contract is $100,000. Other information relevant to a futures-based strategy is given in the following exhibit.

Information for Futures-Based Strategy Bond portfolio modified duration 5 years Bond portfolio yield to maturity 7%

Price value of basis point (PVBP) of bond futures $97.85 Stock index futures price 1378 Stock portfolio beta 1.0

a. Describe the fi nancial futures-based strategy needed and explain how the strategy allows Delsing to implement her allocation adjustment. No calculations are necessary.

b. Compute the number of each of the following needed to implement Delsing’s asset allocation strategy:

i. Bond futures contracts ii. Stock index futures contracts

 LO.1