Question

An investor holds 50,000 shares of an ETF which is trading at $30 and has a...

An investor holds 50,000 shares of an ETF which is trading at $30 and has a beta to the S&P500 of 1.3. The investor wants to hedge against market movements over the next month and decides to use the September eMini S&P 500 futures contract. The index is currently 1,500 and one contract is for delivery of $50 times the index. Which of the following would best hedge the investor’s portfolio?

a. Sell 20 S&P500 futures contracts

b. Buy 1000 S&P500 futures contracts

c. Buy 50000 S&P500 futures contracts

d. Sell 1000 S&P500 futures contracts

e. Sell 26 S&P500 futures contracts

Homework Answers

Answer #1

Solution:-

Since the investor's ETF has a positive correlation with S&P500, therefore the investor needs to take a counter position in S&P500 by selling the contracts for hedging the risk of his position. The number of S&P contracts he needs to sell are calculated as follows:-

Value of ETF portfolio= 50,000 shares*$30= $1,500,000

Value per contract of S&P500= $50*Index value= $50*1,500= $75,000

No. of contracts required to be sold for hedging the portfolio= 1,500,000/75,000= 20 contracts

Thus, the correct option is the first option.

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