2. A hedge fund manager has a portfolio worth $60 million with a beta of 1.5. The manager is concerned about the performance of the market over the next two months He plans to use three-month stock market index futures to hedge his market exposure. The current stock market index level is 2,500 and one contract is on 250 times the futures price. The continuously compounded interest rate is 2% and the dividend yield on the stock market index is 1.5%. a) (0.5 points) What is the fair futures (forward) price today? b) (1 point) How many futures contracts should the fund manager long or short to hedge out his market exposure? c) (1.5 points) Calculate the effect of the hedging strategy on the fund manager's return if the index in two months is 2,250 or 2,750. (Hint: For each scenario, compute the new fair futures price (Fe) with one-month maturity left and the same interest rate and dividend yield. Then, mark to market the value of his futures position (V.) and compute the total dollar profit/loss on hedging. Finally, convert the dollar profit/loss to percentage returns by dividing them by the size of the portfolio, i.e., $60 million.) 2. A hedge fund manager has a portfolio worth $60 million with a beta of 1.5. The manager is concerned about the performance of the market over the next two months He plans to use three-month stock market index futures to hedge his market exposure. The current stock market index level is 2,500 and one contract is on 250 times the futures price. The continuously compounded interest rate is 2% and the dividend yield on the stock market index is 1.5%. a) (0.5 points) What is the fair futures (forward) price today? b) (1 point) How many futures contracts should the fund manager long or short to hedge out his market exposure? c) (1.5 points) Calculate the effect of the hedging strategy on the fund manager's return if the index in two months is 2,250 or 2,750. (Hint: For each scenario, compute the new fair futures price (Fe) with one-month maturity left and the same interest rate and dividend yield. Then, mark to market the value of his futures position (V.) and compute the total dollar profit/loss on hedging. Finally, convert the dollar profit/loss to percentage returns by dividing them by the size of the portfolio, i.e., $60 million.)