Question
2. You manage a $13.5 million portfolio, currently all invested in equities, and has a beta of 1.2. You believe that the market is on
2. You manage a $13.5 million portfolio, currently all invested in equities, and has a beta of 1.2. You believe that the market is on the verge of a big but short-lived downturn; you would move your portfolio temporarily into T-bills, but you do not want to incur the transaction costs of liquidating and reestablishing your equity position. Instead, you decide to temporarily hedge your equity holding with S&P 500 index futures contracts. 1) Should you be long or short the contracts? Why? 2) How many contracts should you enter into? The S&P 500 index futures price is now at 1286 and the contract multiplier is $250. 3) Suppose instead of reducing your portfolio beta all the way down to zero, you decide to reduce it to 0.5, how many index futures contracts should you enter into?
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