Question

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?

c. To reduce portfolio beta to 0.625, how many contracts does the investor need to use?

Answer #1

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