Use the following information for the remaining questions: Assume it is currently October, and the S&P 500 is currently at a level of 1898.20, and S&P 500 e-mini futures with December expiration are trading at a contract price of 1892.75 and have a contract size of 50.

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 believes that 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 associated with the IBM investment.

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

b. Complete the table below. Assume that if IBM exhibits abnormal performance that it will outperform relative to its beta by an extra 7%. If IBM exhibits normal performance its return will be based solely on its beta. For example, with positive performance and the S&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.

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) P/L for IBM based on normal performance -$226,291.38 -$112,634.23 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%) P/L for IBM with positive performance $108,306.38 $5,350.77 $107,706.12 $111,363.27 Net Profit 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) P/L for IBM based on normal performance -$226,291.38 -$112,634.23 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%) P/L for IBM with positive performance $108,306.38 $5,350.77 $107,706.12 $111,363.27 Net Profit with positive performance c. Explain if the futures hedge was successful