Question

Suppose the S&P 500 currently has a level of 960. One contract of S&P 500 index futures has a size of $250× S&P 500 index. You wish to hedge an $800,000-portfolio that has a beta of 1.2.

(A)In order to hedge the risk of your portfolio, should you long the futures or short the futures? Why?

(B)How many S&P 500 futures contracts should you trade to hedge your portfolio?

Answer #1

Suppose the S&P 500 index futures price is currently 1000.
One contract of S&P 500 index futures has a size of $250×
S&P 500 index. You wish to purchase four contracts of futures
on margin. Suppose that the initial margin is 10%. Your position is
marked to market daily. The interest earnings from the margin
account can be ignored.
(A) What is the notional value of your position?
(B) What is the dollar amount of initial margin?
(C) What is...

The S&P 500 is currently valued at $2,700 and the 1-year
Mini Future contract has a price of $2,767. The risk free rate is
2.5% per annum and the S&P 500 dividend yield is 0.5% per
annum. You are managing a portfolio that is worth $10 million and
has a beta of 1.75. (Remember Emini S&P 500 Future contracts
are 50 x price) What position in futures contracts on the S&P
500 is necessary to hedge the portfolio so our...

The S&P 500 is currently valued at $2,700 and the 1-year
Mini Future contract has a price of $2,767. The risk free rate is
2.5% per annum and the S&P 500 dividend yield is 0.5% per
annum. You are managing a portfolio that is worth $10 million and
has a beta of 1.75. (Remember E-mini S&P 500 Future contracts
are 50 x price)
a. What position in futures contracts on the S&P 500 is
necessary to hedge the portfolio?
b....

The S&P 500 Index is currently
at 1,800. You manage a $9m indexed equity portfolio. The S&P
500 futures contract has a multiplier of $250.
If you are temporarily bearish on the stock market, how many
contracts should you sell to fully eliminate your exposure over the
next six months?
If T-bills pay 2% per six months and the semiannual dividend
yield is 1%, what is the parity value of the futures price?
Show that if the contract is fairly...

An investor owns a $250,000 equity portfolio with a beta of
1.25. The S&P 500 index is currently 2,000, the risk-free
interest rate is 4% per annum, and the dividend yield on the index
is 2% per annum.
(a) If the index increases to 2,200 over the next six months,
what is the expected percentage return on the equity portfolio?
(b) Futures contracts (for 100 times the index) are currently
priced at 2,100. How could the investor hedge the portfolio...

On January 1, you sell one April S&P 500 Index futures
contract at a futures price of 2,300. If the April futures price is
2,400 on February 1, your profit would be __________ if you close
your position. (The contract multiplier is 250.)
A)
$12,500 B) -$25,000 C) $25,000 D) -$12,500
The current level of the S&P 500 index is 2,350. The
dividend yield on the S&P 500 is 2%. The risk-free interest
rate is 5%with continuous compounding. The futures price quote for
a contract on...

The S&P 500 Index is currently at 2,000. You manage a $15
million indexed equity portfolio. The S&P 500 futures contract
has a multiplier of $50.
a. If you are temporarily bearish on the stock market, how many
contracts should you sell to fully eliminate your exposure over the
next six months?
b. If T-bills pay 1.8% per six months and the semiannual
dividend yield is 1.6%, what is the parity value of the futures
price? (Do not round intermediate...

In early March an insurance company portfolio manager has a
stock portfolio of $500 million with a portfolio beta of 1.20. The
portfolio manager plans on selling the stocks in the portfolio in
June to be able to pay out funds to policyholders for annuities,
and is worried about a fall in the stock market. In April, the CME
Group S&P 500 mini= Futures contract index is 2545 for a June
futures contract ($50 multiplier for this
contract).
a. What...

You own a portfolio which is valued at $8.5 million and which
has a beta of 1.3. You would like to create a riskless portfolio by
hedging with S&P 500 futures contracts. The contract size is
$250 times the index level. How many futures contracts do you need
to acquire if the current S&P 500 index is 1310?
Select one:
a. Long 34 contracts
b. Short 41 contracts
c. Long 28 contracts
d. Short 34 contracts
e. Short 28 contracts

An investor wants to minimize market risk on a $50 million stock
portfolio by using futures for hedging. The portfolio’s beta with
respect to the S&P 500 equity index is 1.25. The current index
futures quote is 2,875 and each contract is for delivery of $250
times the index.
a. What futures position should the investor open to execute the
hedge? Long or short?
b. How many index futures contracts does the investor need to
use to minimize market risk?...

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