Assume that you manage a $3 million portfolio that pays no dividends and has a beta of 1.45 and an alpha of 1.5% per month. Also, assume that the risk-free rate is 0.025% (per month) and the S&P 500 is at 1,220. If you expect the market to fall within the next 30 days, you can hedge your portfolio by ______ S&P 500 futures contracts (the futures contract has a multiplier of $250).

Question

Quizplus · Accepted Answer

To hedge a portfolio using S&P 500 futures, you need to calculate the number of contracts to sell to offset the portfolio's beta exposure. The formula to calculate the number of futures contracts (N) needed for hedging is: N = (Beta * Value of Portfolio) / (Price of 1 futures contract * Multiplier). Here, N = (1.45 * $3,000,000) / (1,220 * $250) ≈ 14. Therefore, you would need to sell 14 S&P 500 futures contracts to hedge the portfolio.

Assume That You Manage a $3 Million Portfolio That Pays