Explanation:
The number of stock contracts required to hedge the portfolio is calculated as:
Number of stock contracts = Beta of the portfolio × × Contract multiplier
Since the portfolio doesn't perfectly mirror the Nasdaq composite index, the beta of the portfolio of 0.98 will be considered in the calculation.
The number of contracts required = $0.98 \times \left(\frac{633,000,000}{726,500}\right) \times 853.87$
Therefore, the number of contracts required is closest to 854.
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Q.86 Christina Forst, an investment manager, has constructed a portfolio that somewhat mirrors the Nasdaq composite index. The investment manager intends to hedge the portfolio by taking a short position in Nasdaq futures. The current worth of the portfolio is USD 633 million, and the Nasdaq index futures price is 2,906, with each contract on 250 times the index. If the beta of the portfolio is 0.98, then the number of contracts Lange should short to hedge her portfolio is closest to:
A
871 futures contracts
B
854 futures contracts
C
217,825 futures contracts
D
213,469 futures contracts
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