Swan Co manages the $60 million equity portion of Jane Corporations pension assets. In late August 2016 Jane announced that it would be offering early retirement to many of the older employees. The impact on the portfolio Swan manages would be an anticipated $10 million withdrawal over the next 4 months. The stock has been good for the past 5 years, but recently there have been signs of bearishness. Swan is concerned about the drop is asset prices before the $10 million is withdrawn from the portfolio. Swan runs an aggressive portfolio with a beta of 1.2, relative to the S&P500 Index. The following were the prevailing S&P500 futures prices:

Expiration Contract Value $250 * Index

SEP 2016 2088.50

DEC 2016 2100

MAR 2017 2110.50

1. How much of the portfolio should Swan have hedged? Justify your answer. (15 marks)

2. Design a hedge based on your answer to part 1. (15 marks)