Consider a US investor seeking an environmentally friendly portfolio with a low carbon footprint. The investor purchases 2,000,000 units in an exchange traded fund that tracks an ESG index currently priced at $40 per unit. The USA elects a climate change denialist as president, and there are concerns he will undermine international climate agreements. The investor seeks to hedge their exposure using S&P500 futures contracts and forecasts the following variance-covariance matrix

	ESG index	S&P500 index	S&P500 futures
ESG index	1.50	0.83	0.80
S&P500 index	0.83	1.10	1.09
S&P500 futures	0.80	1.09	1.20

The S&P500 futures is currently trading at 5000 points, with each point worth $25.

Assuming the investor is risk averse, the optimal number of S&P500 futures contracts to the nearest integer is

1. 427 short
2. 581 short
3. 483 short
4. 443 short
5. None of the above

Group of answer choices

A

B

D

C

E