Assume that you manage a $2 million portfolio that pays no dividends,has a beta of 1.3 and an alpha of 2% per month.Also,assume that the risk-free rate is 0.05% (per month)and the S&P 500 is at 1500.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 the portfolio, we need to sell S&P 500 futures contracts as we expect the market to fall. The formula to calculate the number of futures contracts required for hedging is:

Number of contracts = (Portfolio Value * Beta) / (Futures Price * Contract multiplier)

Portfolio value = $2 million
Beta = 1.3
Futures price = S&P 500 index level = 1500
Contract multiplier = $250

Number of contracts = (2,000,000 * 1.3) / (1500 * 250)
Number of contracts = 7.33

As we cannot buy or sell fractional futures contracts, we need to round off to the nearest integer, which gives us 7 as the number of futures contracts required to hedge the portfolio. Therefore, the answer is B) selling 7.

Assume That You Manage a $2 Million Portfolio That Pays