Ask Question
1 June, 12:54

You own a portfolio which is valued at $8.5 million and which has a beta of 1.3. You would like to create a riskless portfolio by hedging with S&P 500 futures contracts. The contract size is $250 times the index level. How many futures contracts do you need to acquire if the current S&P 500 index is 1310? Select one: a. Short 41 contracts b. Short 28 contracts c. Short 34 contracts d. Long 28 contracts e. Long 34 contracts

+1
Answers (1)
  1. 1 June, 14:36
    0
    The answer is option (c) Short 34 contracts

    Explanation:

    Solution:

    Given that

    The information about the portfolio is as stated below:

    The value of the portfolio = $8.5 million

    The beta = 1.3

    The future contract of S&P price = $1310

    The size of contract = 250

    Now,

    To hedge the risk completely, the desired beta is = 0

    Thus,

    The number of contracts is calculated as follows:

    The Number of contract = (desired beta - portfolio beta) * portfolio value / (future price*contract size)

    So,

    The number of contracts = (0 - 1.3) * 8500000 / (1310*250) = - 34

    Then,

    The negative sign means it is going short.

    Hence,

    A total of 340 contracts must be short.
Know the Answer?
Not Sure About the Answer?
Get an answer to your question ✅ “You own a portfolio which is valued at $8.5 million and which has a beta of 1.3. You would like to create a riskless portfolio by hedging ...” in 📙 Business if there is no answer or all answers are wrong, use a search bar and try to find the answer among similar questions.
Search for Other Answers