A fund manager has a portfolio worth $50 million with a beta of 0.80. The manager is concerned about the performance of the market over the next two months and plans to use three-month futures contracts on the S&P 500 to hedge the risk. The current level of the S&P 500 index is 1250, the risk-free rate is 6% per annum, and the dividend yield on the index is 3% per annum. The current 3-month S&P 500 index futures price is 1259, and one contract is on 250 times the index.

(a) What position should the fund manager take to eliminate all risk exposure to the market over the next two months? (* =0) How many three-month S&P 500 futures contracts should the fund manager buy or sell now? (Rounding to the nearest whole number.)

(b) Calculate the effect of your strategy on the fund managers returns if the level of the market index in two months is 1,000. Assume that the one-month futures price is 0.25% higher than the market index level in two months. What would be the expected value of the fund managers hedged portfolio (including the spot and futures positions) in two months?