Question
A fund manager has a portfolio worth $50 million with a beta of 0.95. The manager is concerned about the performance of the market over
A fund manager has a portfolio worth $50 million with a beta of 0.95. 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 level of the index is 2,300, one contract is on
250 times the index, the risk-free rate is 5% per annum, and the dividend yield on the index is 2%
per annum.
a) Calculate the theoretical futures price of a 3-month S&P 500 futures price.
b) How many futures contracts should the manager buy or sell to hedge the exposure to the
market over the next 2 months?
c) Calculate the value of the hedged position (stock and futures) if the index in 2 months is 2000.
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