USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Consider a portfolio manager with a $10,000,000 equity portfolio under management. The manager wishes to hedge against a decline in share values using stock index futures. Currently a stock index future is priced at 1350 and has a multiplier of 250. The portfolio beta is 1.50.
-Refer to Exhibit 15.13. Assume that a month later the equity portfolio has a market value of $9,500,000 and the stock index future is priced at 1300 with a multiplier of 250. Calculate the profit on the equity position.
A) $100,000
B) $200,000
C) -$200,000
D) -$500,000
E) -$600,000

Question

Quizplus · Accepted Answer

The profit on the equity position is calculated as the difference between the new market value and the original market value of the equity portfolio. The original market value is $10,000,000 and the new market value is $9,500,000. Therefore, the loss (negative profit) on the equity position is $10,000,000 - $9,500,000 = $500,000.