A fund manager has a portfolio worth $200 million with a beta against the S&P 500 of 1.2. The manager is concerned about the performance of the market over the next 2 months and plans to use 3-month futures contracts on the S&P 500 to hedge the risk. The current 3-month futures price is 2500 and one contract is written on 250 times the index. The risk free rate is 4% per annum and the dividend yield on the index is 2% per annum. The spot S&P 500 index is 2480. Given the information

Calculate the effect of the hedging strategy on the fund managers returns if the index spot price in 2 months is 2000, 2350 and 2700. Assume that the then 1-month S&P 500 futures price is equal to 1.005 times the corresponding index spot price at this time. Assume that the expected rate of return on the unhedged portfolio is given by the Capital Asset Pricing Model.