A portfolio manager has a 500m position in an equity portfolio which tracks the WSM250 index. The manager is concerned about the possibility of a short term fall in the index and consequent decrease in the value of his portfolio. To address this issue the fund manager decides to hedge using futures written on the WSM250 index. The current value of the index is 3,000 points with a continuously compounded dividend yield of 2.1%. The portfolio has a beta of 1.15 with respect to the index. The relevant futures contract has 10 months to maturity and has a contract multiple of 20 per full index point. The risk-free rate of interest is 2.75%. (a) Calculate the futures position required to hedge the portfolio using a beta hedge and explain each step in the process. (30 marks) (b) After 4 months the spot price of the index falls to 2,850 points and the futures position is closed out. Calculate the new quoted futures price, the gain or loss on the futures and spot positions and return on the hedged portfolio. Explain your findings. (40 marks) (c) Discuss whether this is likely to be a perfect hedge. (30 marks)