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Answer: d) Short 12 contracts
First compute the value of the Apple position: \[ 10{,}000 \times 350 = 3{,}500{,}000 \] Then compute the number of S&P 500 futures contracts needed: \[ N = \beta \times \frac{V_p}{V_f} = 1.14 \times \frac{3{,}500{,}000}{250 \times 1343} \approx 11.88 \] Rounding gives **12 contracts**. Because the investor is hedging a long stock position, the correct hedge is to **short 12 contracts**.
Author: Manit Arora
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Question 155.3. An investor holds 10,000 shares of Apple (AAPL), each with a price of $350.00. The beta of Apple’s stock is 1.14. The investor is the market will be very volatile over the next month, but Apple has a good chance of outperforming the market. The investor decides to use short-term futures contracts on the S&P 500 to hedge the position during the one-month period. The current one-month futures price, F(1/12), is 1,343. What is the hedge trade?
A
a) Long 10 contracts
B
b) Short 10 contracts
C
c) Long 12 contracts
D
d) Short 12 contracts
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