Suppose the current value of the so called .UP. index is 900. The value of the portfolio you are managing is 850 million $. The risk free rate interest is 1% per year. There is a dividend yield on the index of 0.25% per year. Assume the Beta of the portfolio is 1.4. Assume you enter a futures contract on the .UP.index with 2 months to maturity to hedge the value of the portfolio over the next month. The current price of the futures contract is 902. One futures contract is $150 times the index. Answer now the following questions. [20 marks]

a) What is the number of future contracts that should be shorted to

hedge the portfolio?

b) Suppose the .UP.index in 1 months.time is now 750 and the futures

price is 751. How much is the gain or loss on the futures position?

c) Calculate the expected value of the portfolio (inclusive of dividends)

at the end of the month :

d) What is the final value of the portfolio at the end of the month?