A. Stock Hedges You manage a well diversified stock portfolio of $35 million that has a beta of 1.6. You want to reduce the portfolio beta to 0.8 using stock index futures. The futures contract has a multiplier of 100 and is priced at 1,126. Should you buy or sell the contracts and how many contracts should you use? a. buy 447 contracts b. sell 447 contracts c. sell 249 contracts d. buy 249 contract

B. Currently, Municipal bond yields are below T-bond yields because of their tax-exempt status. You believe that the spread between U.S. T-bond yields and municipal bond yields is going to narrow in the upcoming month. How can you profit from such a change using the municipal bond and T-bond futures contracts

C. You manage a $11.5 million portfolio, currently all invested in equities, and believe that the market is on the verge of a big but short-lived downturn. You would move your portfolio temporarily into T-bills, but do not want to incur the transaction costs of liquidating and reestablishing your equity position. Instead, you decide to temporarily hedge your equity holdings with S&P index futures contracts. Should you be long or short the contracts? Why? If your equity holdings are invested in a market index fund, into how many contracts should you enter? The S&P 500 index now is at 1150 and the contract multiplier is $250 How does your answer change if the beta of your portfolio is 0.6?