Question
Suppose the S&P 500 currently has a level of 1000. The continuously compounded return on a 1-year T-bill is 4%. You wish to hedge a
Suppose the S&P 500 currently has a level of 1000. The continuously compounded return on a 1-year T-bill is 4%. You wish to hedge a $5.000.000 portfolio that has a beta of 1,5 and a correlation of 1.0 with the S&P 500. The index pays dividends of 1% per annum. The current futures price (F) on the S&P 500 is 1010. A) How many S&P 500 futures contracts should you short to hedge your portfolio? What return do you expect on the hedged portfolio when in three months: a) S&P 500 = 900, F=902, b) S&P 500 = 950, F=952, c) S&P 500 =1000, F=1003, d) S&P 500 = 1050, F=1053. T=3 months.
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