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Jessica manages a $120 million ASX large capitalization equity portfolio, currently forecasts a near-term decline in equity markets. Jess would rather avoid transaction costs associated
Jessica manages a $120 million ASX large capitalization equity portfolio, currently forecasts a near-term decline in equity markets. Jess would rather avoid transaction costs associated with sales but wishes to hedge $30 million of the portfolio's current value using SPI 200 Futures. To isolate the systematic risk, Jessica runs a regression analysis on her actual portfolio returns against the SPI 200 futures over the relevant sample period and finds that the riskminimizing beta of 0.75 with a reliable statistical precision. Futures Contract Data SPI 200 Futures Price 7000 S&P ASX 200 Index 7002 Index multiplier 25 You are required to calculate the number of futures contacts required to hedge $30 million worth of Jessica's portfolio and critically evaluate the mechanics of this hedging strategy
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