Question

last Box's Options are (Short or Long)

Problem 15-08 Alex Andrew, who manages a $86 milion large-capitalization U.S. equity portfolo, currently forecasts that equity markets will decline soon. Andrew prefers to avoid the transaction costs of making sales but wants to hedge $18 million of the portfollo's current value using SaP 500 futures. Because Andrew realizes that his portfolio will not track the SaP 500 Index exactly, he performs a regression analysis on his actual portfolo retums versus the SAP 500 futures returns over the past year. The regression analysis indicates a risk-minimizing beta of 0.87 with a correlation coefficient of 0.96. Futures Contract Data SAP 500 futures price 991 SAP 500 index 990 SAP 500 index multiplier 240 Calculate the number of futures contracts required to hedge $18 million of Andrew's portfollo, using the data shown. Round your answer up to the nearest whole number. contracts State whether the hedge is long or short. The hedge is -Select:

Answer 1

Calculation of number of futures required:

N =( Value of the portfolio /Value of Index futures) * Beta of the portfolio

N = ($ 18,000,000 / (991 * 240) )* 0.87

N = 75.68 * 0.87

N = 65.842 Future contracts

Hence selling of 65 or 66 future contracts (going short) will hedge $18 million of exposure