Question
Alexa Werner is the manager of a $50 million portfolio that is currently 100% large-cap US equities benchmarked to the S&P 500. Werner is concerned
Alexa Werner is the manager of a $50 million portfolio that is currently 100% large-cap US equities benchmarked to the S&P 500. Werner is concerned about market risk in the near term and wishes to earn the risk-free rate on the portfolio over the next three months. Discussing her options with colleagues, Werner makes the following statements:
Statement #1: | Selling the appropriate amount of a three-month S&P 500 stock index futures contract would result in the portfolios market risk largely being offset. |
Statement #2: | Alternatively, entering into an equity-for-fixed rate swap with quarterly payments over the next year as the fixed rate payer (equity receiver) would also offset the portfolios market risk. |
Werner is most likely correct with respect to:
A) statement 1 only.
B) both statements 1 and 2.
C) statement 2 only.
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