In October an environmentally conscious insurance company portfolio manager has a stock portfolio of $5,000,000 with a portfolio beta of 1 invested in a diversified environmental, social, corporate governance (ESG) stocks of well-run companies that meet sustainability criteria , while maintaining similar overall industry group weights as the S&P 500. The portfolio manager plans on selling the portfolio in December to be able to pay out funds to policyholders for annuities and is concerned about a potential fall in S&P 500 ESG index, so wants to hedge using the CME Group E-mini S&P 500 ESG Futures December contracts that at this time has an index price of 372.94 ($500 multiplier x the index price to get the total price of the contract).

a. 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 = [Portfolio x Beta] /[ Futures Index Price x Multiplier]; recall The rounding rule for fractional contracts, round up if >.50)

Type of Position _______________ Explain why __________________________ How many contracts should you get? Number of Contracts_______________

b. Suppose in December the stock market (S&P500 500 ESG index) falls by 10% and the E-mini S&P500 ESG futures contract index falls 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 ___________