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. How many contracts should you buy or sell to hedge your position Allow fractions of contracts in your answer.
A)sell 1.714
B)buy 1.714
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.  How many contracts should you buy or sell to hedge your position Allow fractions of contracts in your answer.
A)sell 1.714 
B)buy 1.714 
C)sell 4.236 
D)buy 4.236 
E)sell 11.235

Quizplus · Accepted Answer

The number of contracts equals the hedge ratio = change in portfolio value/profit on one futures contract = $85,700/$50,000 = 1.714.You should sell the contract because as the market falls the value of the futures contract will rise and will offset the decline in the portfolio's value.

You Are Given the Following Information About a Portfolio You