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 level of the index is 4450, one contract is on 50 times the index, the risk-free rate is 6% per annum, and the dividend yield on the index is 3% per annum. The current 3-month futures price is 4517.

What position should the fund manager take to eliminate all exposure to the market over the next two months?

Calculate the effect of your strategy on the fund managers returns if the level of the market in two months is 4005. Assume that the one-month futures price is 4015 at this time.