Assume that you manage an equity portfolio. The portfolio beta is 1.15. You anticipate a decline in equity values and wish to hedge $500 million of the portfolio. Calculate the number of contracts you would need to hedge your position and indicate whether you would go short or long. Assume that the price of the S&P 500 futures contract is 1105 and the multiplier is 250.
A) 2500 contracts short
B) 1810 contracts short
C) 1810 contracts long
D) 2081 contracts short
E) 2081 contracts long

Question

Quizplus · Accepted Answer

To calculate the number of contracts needed to hedge the position, use the formula:

Number of Contracts = (portfolio value to be hedged * portfolio beta) / (futures contract price * futures multiplier)

Plugging in the numbers, we get:

Number of Contracts = ($500 million * 1.15) / (1105 * 250)
Number of Contracts = 2081 contracts

Since we are anticipating a decline in equity values, we would go short on the futures contract to hedge our position. Therefore, the correct answer is D) 2081 contracts short.

Assume That You Manage an Equity Portfolio