Explanation:
Number of contracts =
Number of contracts = $1.1 \times [`
Number of contracts = 24 contracts
As the manager wishes to reduce (hedge) exposure, she needs to go short (sell) 24 futures contracts. Note that we round up/down to the nearest whole number, as it is only possible to trade in whole numbers.
(Book 3, Module 34.1, LO 34.e)
Ultimate access to all questions.
Question 44
A portfolio manager of a $32 million U.S. equity portfolio specializes in large-cap stocks. Her short-term forecast for equities is poor, and she wishes to hedge exposure to market risk over the next few months. The beta of the portfolio is 1.1, the S&P 500 Index futures is trading at 5,825, and the multiplier is 250. The standard deviation of the portfolio is 15.2% and the risk-free rate is 4%. What is the number of futures contracts needed to fully hedge this position?
A
Short 22 contracts.
B
Long 22 contracts.
C
Short 24 contracts.
D
Long 24 contracts.
No comments yet.