Question 2 (10 marks)

a)It is July 16. A company has a portfolio of stocks currently worth $10 million. The beta of the

portfolio is 1.5. The company would like to double their effective portfolio beta by using the

CME December futures contract on the S&P 500 to take increased advantage of what they expect

to be a growing equity market. The S&P 500 index is currently 1654, and the S&P 500 index

futures are currently being quoted at 1667. (Note: The underlying value in one S&P Futures

contract is calculated by multiplying the futures price quote by $250 per index point.)

How many contracts would they need to take to achieve their goals? Show your working and

explicitly state whether you intend to go long or short in the contracts.