You are given the following information about a portfolio you are to manage. For the long term, you are bullish, but you think the market may fall over the next month. $\begin{array}{lc}
\text { Portfolio Value} &\$ \quad \text { 1million } \
\text { Portfolio's Beta} &0.86\
\text { Current S\&P500 value } &990\
\text {Anticipated S\&P500 Value } &915\
\end{array}$

How many contracts should you buy or sell to hedge your position? Allow fractions of contracts in your answer.
A) Sell 3.475
B) Buy 3.475
C) Sell 4.236
D) Buy 4.236
E) Sell 11.235

Question

You are given the following information about a portfolio you are to manage. For the long term, you are bullish, but you think the market may fall over the next month. $\begin{array}{lc}
  \text {  Portfolio Value} &\$ \quad \text { 1million } \
 \text {  Portfolio's Beta} &0.86\
 \text { Current S\&P500 value } &990\
 \text {Anticipated S\&P500 Value  } &915\
\end{array}$

How many contracts should you buy or sell to hedge your position? Allow fractions of contracts in your answer.
A) Sell 3.475
B) Buy 3.475
C) Sell 4.236
D) Buy 4.236
E) Sell 11.235

Quizplus · Accepted Answer

To hedge the portfolio, you need to sell futures contracts. The number of contracts is calculated using the formula: $(\text{Portfolio Value} \times \text{Portfolio's Beta}) / (\text{Current S\&P500 value} \times \text{Contract Multiplier})$. Assuming a contract multiplier of 250, the calculation is $(1,000,000 \times 0.86) / (990 \times 250) = 3.475$. Therefore, you should sell 3.475 contracts.

You Are Given the Following Information About a Portfolio You