QUESTION 10

1. a) Assume that you manage a $3.5 million portfolio that pays no dividends and has a beta of 1.37 and an alpha of 2% per month. Also, assume that the risk-free rate is 0.05% (per month) and the S&P 500 is at 1,500. If you expect the market to fall within the next 30 days, how you can hedge your portfolio using S&P 500 futures contracts (the futures contract has a multiplier of $500)? (4 marks)

   b) Suppose a U.S. investor wishes to invest in a British firm currently selling for 40 per share. The investor has $16,000 to invest, and the current exchange rate is $2.0/.

   i) How many shares can the investor purchase? (2 marks)

   ii) Calculate pound-denominated return and dollar-denominated return after 1 year if exchange rate turns out to be $1.90/ and share price is 50. (6 marks)

   iii) Now suppose the investor also sells forward 8,000 at a forward exchange rate of $2.00/. Recalculate the dollar-denominated returns. (7 marks)