A Canadian portfolio manager holds a CAD$40 million all-equity portfolio with an estimated beta of 1.65. She decides to use three-month S&P/TSX60 futures contracts (the main equity index in Canada) to reduce exposure to systematic risk over the next two months. Each futures contract is for the delivery of CAD$200 times the index. The current level of the S&P/TSX60 index is 1,168 and it has an estimated dividend yield of 3.0% per annum. The current risk-free interest rate is 2.4% per annum. The current quoted futures price is 1,210.

Answer the following questions in the boxes provided below each question.

(a): What is the number of futures contracts required to decrease the beta of the overall position to 1.00 over the next two months?

(b): Is a long or a short position in the futures required?

After two months the S&P/TSX60 index has risen to 1,250, the new futures price is 1,285, and the portfolio manager decides to close out the futures position.

(c): Has the futures trade made a gain or loss?

(d): Given the change in the index value, what is the value of the manager's total hedged position (equity plus futures) over the two-month period? (You should assume that the dividend yield on the index and the risk-free rate are expressed as annual rates of interest in your calculations; similar to what we did in the lecture and tutorial examples).

(e): What is the expected return of the hedged position? (express answer as a numeral with three decimal places, e.g. 0.053)