Explanation:
To hedge a portfolio using futures, the number of contracts needed is calculated as:
Number of contracts = (Target Beta - Current Beta) × (Portfolio Value) / (Futures Contract Value)
Where:
$300,100,000$364,250Calculation: Number of contracts = (0.75 - 1.1) × 300,100,000 / 364,250 = (-0.35) × 300,100,000 / 364,250 = -105,035,000 / 364,250 ≈ -288.3
The negative sign indicates selling contracts. Therefore, the trader should sell approximately 288 contracts.
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The current value of the S&P 500 index futures is 1457, and each S&P futures contract is for delivery of 250 times the index. A long-only equity portfolio with market value of USD 300,100,000 has beta of 1.1. To reduce the portfolio beta to 0.75, how many S&P futures contract should you sell?
A
288 contracts
B
618 contracts
C
906 contracts
D
574 contracts
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