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. You hold 50,000 shares of stock AAA. Your stock trades for $30/share today. You decide...

. You hold 50,000 shares of stock AAA. Your stock trades for $30/share today. You decide to use the Mini S&P500 index futures for the next month in order to hedge price fluctuations of your stock. The 2-month futures price is 1,500 and its $m = $50. Your stock’s beta with this index is 1.3.

                Use a time table to show how you will open a minimum variance hedge ratio hedge today.

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Answer #1

Hedge by taking short position

calculate the number of contracts required.

1.3*(50000*30)/1500*50 = 26 contracts

Spot market Futures
Date
t Hold 50,000 shares take a short position of 26 contracts
Expiry Do nothing
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