number 11

Stock Hedging An investor holds 50,000 shares of a certain stock. The market price is 101 point $30 per share. The investor is interested in hedging against movements What position in futures contracts would the investor take? (positive in the market over the next month and decides to use an index futures for long, negative for short) contract. The index futures price is currently 1,500 and one contract is for delivery of $50 times the index. The beta of the stock is 1.3. Furthermore, suppose the risk-free rate is 3%. Let's ignore dividends entirely for this question. 111 point Suppose the market drops by 5%. Then, the investor will have outperformed the market and locked in gains from the futures contract if the stock doesn't drop by more than %