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PLEASE PROVIDE FORMULAS!!! Thanks! A fund manager has a portfolio worth $80 million with a beta of 0.90. The manager is concerned about the performance
PLEASE PROVIDE FORMULAS!!! Thanks!
A fund manager has a portfolio worth $80 million with a beta of 0.90. The manager is concerned about the performance of the market over the next two months and plans to use three-month futures contracts on a well-diversified index to hedge its risk. The current index level is 2,600, one contract is on 250 times the index, the risk-free rate is 2.50% per annum, and the dividend yield on the index is 2%. The current three-month futures price is 2,670. | ||||||
Spot index value | 2,600 | |||||
Multiplier on the index (per contract) | 250 | |||||
Value of fund | $80,000,000 | |||||
Beta of fund | 0.90 | |||||
Risk-free rate (per annum) | 2.50% | |||||
Dividend yield (per annum) | 2.00% | |||||
Three-month futures price | 2,670 | |||||
What position should the fund manager take to hedge exposure to the market over the next two months? | ||||||
Position: | ||||||
Contracts: | ||||||
Calculate the effect of your strategy on the fund manager's returns if the level of the market in two months is 2,000, 2,200, 2,400, and 2,600. Assume that the one-month futures price is 0.25% higher than the index level at this time. | ||||||
Percentage that the futures price is higher than the index level | 0.25% | |||||
Value of index in two months | 2,000.00 | 2,200.00 | 2,400.00 | 2,860.00 | ||
Futures price of index in two months | ||||||
Gain (loss) on futures position ($) | ||||||
Expected return on the index in two months (%) | ||||||
Expected return on the index (incl. dividends) in two months (%) | ||||||
Excess return on the index (incl. dividends) above risk-free rate (%) | ||||||
Excess return on (unhedged) portfolio above risk-free rate (%) | ||||||
Expected return on (unhedged) portfolio over two months (%) | ||||||
Value of (unhedged) portfolio in two months ($) | ||||||
Total value of position in two months ($) | ||||||
Expected return on (hedged) portfolio over two months (%) |
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