Some values are provided with the previous question.Shares of IBM are currently trading at $168.55 (Beta=0.64). Over the previous month, IBM has fallen over 13%. An investor believesthat this is a market overreaction, and that the price will correct by at least 7% before the end of the year. The investor plans to speculate by purchasing 10,000 shares. However, the investor is bearish with respect to the overall market, and wishes to hedge the systematic risk associatedwith the IBM investment.

a.Explain the steps the investor would take within the futures market to hedge thesystematic risk of the position

b.Complete the table below. Assume that if IBM exhibits abnormal performance that it willoutperform relative to its beta by an extra 7%. If IBM exhibits normal performance itsreturn will be based solely on its beta. For example, with positive performance and theS&P 500 at 1500, the return to IBM would be -13.43% without positive performance, or -6.43% (=-13.43% + 7.00%) with positive performance.

c. Explain if the futures hedge was successful.

S&P 500 % Change in S&P 500 index Futures P/L 1500 -20.98% $216,012.50 1700 -10.44% $106,012.50 2200 15.90% -6.68% % Change in IBM based on normal performance -13.43% (=-20.98%*0.64) -$226,291.38 $112,634.23 P/L for IBM based on normal performance Net Profit (IBM and futures) based on normal performance -$10,278.88 -$6,621.73 For all rows below this point- Assume IBM exhibits 7% abnormal performance % Change in IBM with positive -6.43% 0.32% performance (=-20.98%*0.64+7%) -$108,306.38 $5,350.77 P/L for IBM with positive performance $107,706.12 $111,363.27 Net Profit with positive performance S&P 500 % Change in S&P 500 index Futures P/L 1500 -20.98% $216,012.50 1700 -10.44% $106,012.50 2200 15.90% -6.68% % Change in IBM based on normal performance -13.43% (=-20.98%*0.64) -$226,291.38 $112,634.23 P/L for IBM based on normal performance Net Profit (IBM and futures) based on normal performance -$10,278.88 -$6,621.73 For all rows below this point- Assume IBM exhibits 7% abnormal performance % Change in IBM with positive -6.43% 0.32% performance (=-20.98%*0.64+7%) -$108,306.38 $5,350.77 P/L for IBM with positive performance $107,706.12 $111,363.27 Net Profit with positive performance