Exhibit 21.9
Use the Information Below for the Following Problem(S)
As a portfolio manager, you are responsible for a $150 million portfolio, 90 percent of which is invested in equities, with a portfolio beta of 1.25. You are utilizing the S&P 500 as your passive benchmark. Currently the S&P 500 is valued at 1202. The value of the S&P 500 futures contract is equal to $250 times the value of the index. The beta of the futures contract is 1.0.
-Refer to Exhibit 21.9.If you anticipate a cash outflow of $5 million next week,how many futures contracts should you buy or sell in order to mitigate the effect of this outflow on the portfolio's performance (rounded to the nearest integer)?
A) Sell 21 contracts
B) Buy 21 contracts
C) Sell 17 contracts
D) Buy 17 contracts
E) None of the above

Question

Quizplus · Accepted Answer

Value of S&P 500 futures contract = $300,500
Number of contracts = (5,000,000/300,500)(1.25)= 20.80
20.80 contracts should be sold to hedge cash outflow.

Exhibit 21.9 Use the Information Below for the Following Problem(S)