1. In October, an insurance company portfolio manager for the Safe & Easy Insurance Corporation has a stock portfolio of $ 20 million with a portfolio beta of 1.10. The portfolio manager plans on selling the stocks in the portfolio in December to be able to pay out funds to policyholders for annuities, and is worried about a fall in the stock market. In December, the CME Group E-Mini S&P 500 Futures contract index is 3772.00 for a December futures contract ($50 multiplier for the contract).

a. What type of futures position should be taken to hedge against the stock market going down and how many future contracts are needed for this hedge? [Hint: # contracts = [Amount Hedged / Futures Index Price x Multiplier] x Beta Portfolio

Type of Position _____________

Explain why ________________________________________

# of Contracts_____________

b. Suppose in December the stock market (S&P500 index) falls by 10% and the S&P500 futures index falls by 10% as well, what is the portfolio managers spot gain or loss, and his futures gain (loss) and the net hedging result?

Spot Gain or Loss ____________

Futures Gain or Loss ___________

Net Hedging Result _____________