You manage the $60 million equity portion of Zee Corps pension assets. On Friday 7th August, Zee announced that it is downsizing its workforce and would be offering early retirement to many of its employees. The impact on the portfolio you manage would be an anticipated $10 million withdrawal over the next 4 months. The stock market has been good for the past 5 years, but recently there have been signs of weakness. You are concerned about a drop in asset prices before the $10 million is withdrawn from the portfolio. You run a fairly aggressive portfolio with a beta of 1.2, relative to the S&P 500 Index.

You see the following S&P 500 index futures prices:

Expiration Contract Value ($250 x Index)

SEP 1088.50

DEC 1100.00

MARx1 1110.50

A. How much of the portfolio should you hedge? Justify your answer.

B. Design a hedge based on your answer to part A above.

C. When and how would you unwind your hedge?