Answer-first summary for fast verification
Answer: Short 30 contracts
To reduce a portfolio's beta, you take a **short** position in stock index futures. The number of contracts is: \[ N = \frac{(\beta_P - \beta_T) V_P}{\text{futures contract value}} \] Here, the beta reduction needed is: \[ 1.20 - 0.30 = 0.90 \] Using the implied contract notional of about \$300,000 per E-mini Nasdaq-100 futures contract, the hedge requires: \[ N = \frac{0.90 \times 10{,}000{,}000}{300{,}000} = 30 \] So the correct action is **short 30 contracts**.
Author: Manit Arora
Ultimate access to all questions.
Q-21.14.2. Stock index futures and beta adjustment
A tech portfolio with a value of `\beta(P, \text{NASDAQ-100}), of 1.20. The desired hedging contract is the E-mini Nasdaq-100 futures contract. The size (i.e., contract unit) of this futures contract is \`20.00` * Index Value. If the goal is to reduce the portfolio's beta (from 1.20) to 0.30, how many contracts should be employed?
A
Long 15 contracts
B
Short 5 contracts
C
Short 30 contracts
D
Short 120 contracts
No comments yet.