A trader has a portfolio worth $5 million that mirrors the performance of a stock index.The stock index is currently 1,250.Futures contracts trade on the index with one contract being on 250 times the index.To remove market risk from the portfolio the trader should
A) Buy 16 contracts
B) Sell 16 contracts
C) Buy 20 contracts
D) Sell 20 contracts

Question

Quizplus · Accepted Answer

One futures contract protects a portfolio worth 1250×250.The number of contract required is therefore 5,000,000/(1250×250)=16.To remove market risk we need to gain on the contracts when the market declines.A short futures position is therefore required.

A Trader Has a Portfolio Worth $5 Million That Mirrors