In March, Greg Young, an insurance company portfolio manager for the Stay Solid Insurance Corporation has a stock portfolio of $500 million with a portfolio beta of 1.20. The portfolio manager plans on selling the stocks in the portfolio in June to be able to pay out funds to policyholders for annuities, and is worried about a fall in the stock market. In March, the CME Group E-Mini S&P 500 Futures contract index is 2752.75 for a June futures contract ($50 multiplier for the contract).

What type of futures position should be taken to hedge against the stock market going down and how many future contracts are needed for this hedge?

[Hint: # contracts = [Amount Hedged / Futures Index Price x Multiplier] x Beta Portfolio

Type of Position _____________

Explain why ________________________________________

# of Contracts_____________

Suppose in June the stock market (S&P500 index) rises by 10% and the S&P500 futures index rises by 10% as well, what is the portfolio managers opportunity loss (gain) on his portfolio, and his futures gain (loss) and the net hedging result?

Spot Gain or Loss ____________ Futures Gain or Loss ___________

Net Hedging Result _____________

c. What are the advantages and disadvantages of getting put options (options to sell) on S&P500 Mini Futures Contracts versus using Futures Options? Explain why or why not.

Yes or No _______________ Explain why _________________________