Approximately how many TSX 60 futures contracts are needed to hedge a portfolio constructed of 4500 shares of each of the three stocks,X,Y and Z against a 20 point movement in the TSX?

Question

Quizplus · Accepted Answer

To hedge the portfolio, we need to calculate the dollar value of the portfolio and then divide it by the value of one futures contract. The TSX 60 futures contract is worth $200 per index point, so the value of one contract is $4,000 (200 x 20).

The value of the portfolio is:
4500 shares of X x $25 per share = $112,500
4500 shares of Y x $50 per share = $225,000
4500 shares of Z x $75 per share = $337,500
Total portfolio value = $675,000

Dividing $675,000 by the value of one futures contract ($4,000) gives approximately 168.75 futures contracts needed. Since futures contracts are standardized, we must round up to the nearest whole number, which is 169.

Since each futures contract represents exposure to the TSX 60 and cannot be broken down into smaller units, we need to use whole numbers of contracts. Therefore, we need 2 futures contracts to hedge the portfolio against a 20 point movement in the TSX.

Approximately How Many TSX 60 Futures Contracts Are Needed to Hedge