PROBLEM 4: The stocks in the hedge funds portfolio have a dividend yield of 1.50%.

1. If the dividend is paid continuously, the current interest rate 3% (borrow and lend), and the stocks are trading at 3900 today, what is the expected price of a 6-month forward? Carry out your calculations to 4 decimals, and then round your answer to the nearest integer (whole number).

2. Each index point in the forward contract is worth $100 (i.e., the multiplier is 100). The portfolio of stocks is valued at $800 million. If the forward is priced at 3929 index points, how many forwards (in futures equivalents) do you need to hedge these stocks? Round your answer to the nearest integer (whole contract). [Hint: Use the forward price for the futures equivalent calculation.]

PROBLEM 4, cont.

3. Same as in Part c), but now the portfolio of stocks has a beta of 0.75, and the forward contract has a beta of 1.0. How many beta-adjusted forwards (in futures equivalents) do you need to hedge these stocks? Round your answer to the nearest integer (whole contract). Should these forwards be long or short? Why?

4. Same as in Part c), but now the portfolio of stocks has a beta of 0.75, the forward contract has a beta of 1.0, and your portfolio has a target beta of 1.25. If you use forwards to adjust the portfolios beta from 0.75 to 1.25, how many forwards will be needed? Round your answer to the nearest integer (whole contract). Should these forwards be long or short? Why?