Date Portfolio 1/2/2014 50000000 13/201449781319.71 1825 1/6201449643463.28 1820

Question

Date Portfolio 1/2/2014 50000000 13/201449781319.71 1825 1/6201449643463.28 1820 1/7/201449989304 26 1830 1/8/2014 50163342.4 1832 19/2014 50227798.06 1835 1/10/2014 50297609.98 1837 1/13/201 875797.61 1815.1 1/15/2014 50385376 33 1841 1/1620145027257947 18362 1/172014 5006941752 1834.3 1/21/2014 50265344 56 1838 1/22/2014 50470972.97 1838 23/2014 50053426.56 1824.2 1/24/2014 49107050.54 1782.1 1/27/201449019274.91 1775.7 1/28/2014 49515735.23 1788 1/29/2014 48960336.5517712 1/30/2014 49115178.43 1781 1/31/2014 49105483.52 1776 232014 47724974.14 17328 2/4/2014 48181405.11 1743 2/5/2014 48297523.62 1744 Table 1: Value of stock portfolio and price of March 2014 S&P 500 Futures It is Feb 05, 2014. You have decided to hedge the value of your portfolio over the next month by using the March 2014 S&P futures contract. Table gives you the value of your portfolio and the futures price since 01/02/2014. The futures contract size is 250 times the index a) Should you buy or sell futures to hedge this portfolio? b) Compute the number of contracts necessary to fully hedge the position. derive the hedge ratio Explain how you

Explanation / Answer

We already had certain investment, which means we had already purchased the security. Which means we are having risk of prices falling in future. Now, in order to hedge the portfolio for the risk of prices falling, we need to sell the futures contract which will pay us when the prices of securities fall.

So, our answer will be Sell Futures.

b) Now, in order to calculate number of contracts necessary to hedge the position, we need to first determine the number or shares held by us. On Feb 5, 2014 Our Portfolio value was 48,297,523.62 and the share price was 1744 at the time of purchase, that means, the number of shares we purchased was 48,297,523.62/1744 = 27693.5 shares almost.

Our per contract lot size for futures is 27693.5 / 250 = 110.77.

This means we need to sell almost 111 contracts of future in order to hedge the portfolio.  

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