3. Assume that the value of the Pernellis’ portfolio declined by $32 000, while the level of an ASX 200 Index futures contract moved from 3256 to 2776. (Assume that Jim and Polly short sold two futures contracts to set up the hedge.)

a. Add the profit from the hedge transaction to the new (depreciated) value of the share portfolio. How does this amount compare to the $175 000 portfolio that existed just before the market started its retreat?

b. Why did the market-index futures hedge fail to give complete protection to the Pernellis’ portfolio? Is it possible to obtain perfect (dollar-for-dollar) protection from these types of hedges? Explain.