A fund manager has a portfolio worth $50 million with a beta of 0.87. The manager is concerned about the performance of the market over the next two months and plans to use three-month futures contracts on a well-diversified index to hedge its risk. The current index level is 2,670, one contract is on 250 times the index, the risk-free rate is 2.50% per annum, and the dividend yield on the index is 296. The current three-month futures price is 2,677 Spot index value Multiplier on the index (per contract Value of fund Beta of fund Risk-free rate (per annum) Dividend yield (per annum) Three-month futures price 2,670 250 $50,000,000 0.87 2.50% 2.00% 2,677 What position should the fund manager take to hedge exposure to the market over the next two Position: Contracts Calculate the effect of your strategy on the fund manager's returns if the level of the market in two Percentage that the futures price is higher than the index level 0.25% Value of index in two months Futures price of index in two months Gain (loss) on futures position ($ Expected return on the index in two months (96 Expected return on the index (incl. dividends) in two Excess return on the index (incl. dividends) above risk Excess return on (unhedged) portfolio above risk-free Expected return on (unhedged) portfolio over two Value of (unhedged) portfolio in two months ($ Total value of position in two months ($ Expected return on (hedged) portfolio over two months 2,500.00 2,600.002,700.00 2,800.00