You manage a $13.5 million portfolio, currently all invested in equities, and has a beta of 1.2. You believe that the market is on the verge of a big but short-lived downturn; you would move your portfolio temporarily into T-bills, but you do not want to incur the transaction costs of liquidating and reestablishing your equity position. Instead, you decide to temporarily hedge your equity holding with S&P 500 index futures contracts.

1. 1)Should you be long or short the contracts? Why?
2. 2)How many contracts should you enter into? The S&P 500 index futures price is
3. now at 1286 and the contract multiplier is $250.
4. 3)Suppose instead of reducing your portfolio beta all the way down to zero, you
5. decide to reduce it to 0.5, how many index futures contracts should you enter into?