Question 3 [10 Marks] I currently own a portfolio of stocks worth $10 million that has a beta of 1.2. It has perfect positive correlation with the S&P500 index. The risk-free rate is 3%, and the market risk premium for the S&P500 is 8%. The S&P500 is currently valued at 2500. The notional value of one contract is $250*S&P value. a) Calculate the one-year futures price on the S&P500 index. [2 marks] b) If I want to own a risk-free bond instead of the index, explain how I can do this without selling my portfolio of stocks and purchasing bonds. Calculate the number of futures contracts I need to achieve this and specify if the contracts are long or short. [3 Marks] c) Suppose that instead of wanting to own a risk-free bond, I instead want to own the Russell 3000 index. Explain how I can do this without selling my portfolio of stocks that is correlated with the S&P500 and buying the Russell 3000 (HINT: futures are available on both the S&P500 and the Russell 3000). No calculations are required - simply explain the necessary steps. [5 Marks] Question 3 [10 Marks] I currently own a portfolio of stocks worth $10 million that has a beta of 1.2. It has perfect positive correlation with the S&P500 index. The risk-free rate is 3%, and the market risk premium for the S&P500 is 8%. The S&P500 is currently valued at 2500. The notional value of one contract is $250*S&P value. a) Calculate the one-year futures price on the S&P500 index. [2 marks] b) If I want to own a risk-free bond instead of the index, explain how I can do this without selling my portfolio of stocks and purchasing bonds. Calculate the number of futures contracts I need to achieve this and specify if the contracts are long or short. [3 Marks] c) Suppose that instead of wanting to own a risk-free bond, I instead want to own the Russell 3000 index. Explain how I can do this without selling my portfolio of stocks that is correlated with the S&P500 and buying the Russell 3000 (HINT: futures are available on both the S&P500 and the Russell 3000). No calculations are required - simply explain the necessary steps. [5 Marks]