Question

A company has a $10 million portfolio with beta of 1.2. How can it buy the S&P500 futures contract (with a multiplier of 500) to create an optimal hedge against a stock decline and what is the hedged return? Futures index is 1000

1. Short 24 S&P500 futures contracts for a return of 0% while edged
2. Short 24 S&P500 futures contracts for a risk-free return while hedged

Please explain why.

Answer 1

short number of futures contracts=10*10^6*1.2/(500*1000)=24.00

Short 24 S&P500 futures contracts for a risk-free return while hedged

The hedged position gives risk free return