In October an insurance company portfolio manager has a stock portfolio of $950 million with a portfolio beta of 0.85. The manager is planning to sell the stocks in the portfolio in December to be able to pay out funds to policyholders, and is worried about a fall in the stock market. In October the CME Group offers a December S&P 500 futures contract with a settle price of 2155.50 ($250 multiplier for the contract).
a. What type of futures position should be taken to hedge against the stock market going down and how many future contracts are needed for this hedge?
[Hint: # contracts = {[Amount Hedged / Futures Index Price x Multiplier]} x Beta Portfolio]
b. Suppose in December the stock market (S&P500 index) falls by 10% and the S&P500 futures index falls by 10% as well.
What is the portfolio manager's opportunity loss (gain) on his portfolio, and his futures gain (loss) and the net hedging result?

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The Answer of In October an insurance company portfolio manager has a stock portfolio of $950 million with a portfolio beta of 0.85. The manager is planning to sell the stocks in the portfolio in December to be able to pay out funds to policyholders, and is worried about a fall in the stock market. In October the CME Group offers a December S&P 500 futures contract with a settle price of 2155.50 ($250 multiplier for the contract).
a. What type of futures position should be taken to hedge against the stock market going down and how many future contracts are needed for this hedge?
[Hint: # contracts = {[Amount Hedged / Futures Index Price x Multiplier]} x Beta Portfolio]
b. Suppose in December the stock market (S&P500 index) falls by 10% and the S&P500 futures index falls by 10% as well.
What is the portfolio manager's opportunity loss (gain) on his portfolio, and his futures gain (loss) and the net hedging result?

In October an Insurance Company Portfolio Manager Has a Stock