The S&P; 500 Index is currently at 1,500. You manage a $18 million indexed equit

Question

The S&P; 500 Index is currently at 1,500. You manage a $18 million 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 2.0% per six months and the semiannual dividend yield is 1.8%, what is the parity value of the futures price? Instead of holding an indexed portfolio, you hold a portfolio of only one stock with a beta of 0.6, how many contracts would you now choose to sell?

Explanation / Answer

Answer:a Each contract is for $250 times the index, currently valued at 1500. Therefore, each contract has the same exposure to the market as (1500*250)=375000 worth of stock and to hedge $18 million portfolio. You need:

$18000000/$375000=48 contracts

Answer:c 48 contracts*0.6=28.8 contract

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