Question
A $30 million portfolio consists of $20 million of stock at a beta of 1.15 and $10 million of bonds at a modified duration of
A $30 million portfolio consists of $20 million of stock at a beta of 1.15 and $10 million of bonds at a modified duration of 6.25 with a yield of 7.15 percent. The manager would like to change the allocation to $15 million of stock and $15 million of bonds. In addition, the manager would like to adjust the beta on the stock to 1.05 and the modified duration on the bonds to 7. A stock index futures contract has a price of 900 and a multiplier of 250, and we can assume that its beta is 1.0. A bond futures contract is priced at $92,000 with an implied modified duration of 5.9 and an implied yield of 5.65 percent. The manager will use futures to synthetically achieve the desired objective. What futures transaction would accomplish the objective?
1) sell 1 stock index futures and sell 5 bond futures contracts
2) buy 18 stock index futures and sell 32 bond futures contracts
3) sell 16 stock index futures and sell 0 bond futures contracts
4) sell 33 stock index futures and buy 78 bond futures contracts
5) none of the above
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