4. Your firm is concerned about the downside risk of a project and an analysis shows that hedging is beneficial because the value saved from hedging outweighs the hedging costs. It is speculated that the project may corelate with a stock index. The past 12-month information on the project and index return are provided below. Project Return Index Return Month 1 2 3 4 5 6 7 8 9 10 11 12 0.04 -0.01 0.05 0.07 0.01 0.001 0.03 0.05 0.02 0.01 0 0.01 0.02 -0.03 0.05 0.04 0.02 0.01 0.04 0.04 0.04 0.01 -0.01 0 A. Assuming a future contract on the index is available. Will you buy or sell the futures contract to protect the downside risk? B. Will you buy sell one full contract or a fraction of a contract, assuming the latter is possible? Please show work and justify your answer. C. Suppose on maturity the index is down 5%. Show that the futures contract will completely protect the downside, if the above relationship holds. 4. Your firm is concerned about the downside risk of a project and an analysis shows that hedging is beneficial because the value saved from hedging outweighs the hedging costs. It is speculated that the project may corelate with a stock index. The past 12-month information on the project and index return are provided below. Project Return Index Return Month 1 2 3 4 5 6 7 8 9 10 11 12 0.04 -0.01 0.05 0.07 0.01 0.001 0.03 0.05 0.02 0.01 0 0.01 0.02 -0.03 0.05 0.04 0.02 0.01 0.04 0.04 0.04 0.01 -0.01 0 A. Assuming a future contract on the index is available. Will you buy or sell the futures contract to protect the downside risk? B. Will you buy sell one full contract or a fraction of a contract, assuming the latter is possible? Please show work and justify your answer. C. Suppose on maturity the index is down 5%. Show that the futures contract will completely protect the downside, if the above relationship holds