HomeworkLib
Question

You need to hedge the risk in a stock portfolio that your company owns in it's...

You need to hedge the risk in a stock portfolio that your company owns in it's pension plan using the E-mini S&P500 futures contracts (that has a multiplier of 50). The current value of the portfolio is $325 million and the S&P500 is currently at 2637.72 while the futures price for the next month delivery is at 2643.25. You estimate that the beta of this portfolio is 1.1 while the beta of the S&P500 is 1. What position do you take in futures. You need to round to the nearest contract. How would you change your answer if you decided to tail the hedge.

In the question above, suppose it is 1 month (1/12 of a year) until delivery of the futures and the 1 month interest rate is 3.5% per annum. Using the S&P500 index level and the futures price, what must the dividend yield on the S&P500 be in order to preclude arbitrage? (Round to the neareest 1/100th of a percent)

business   finance   
0 0
Add a comment Improve this question Transcribed image text
Next > < Previous
Sort answers by oldest

Homework Answers

Answer #1

ANSWER: Paut1) The optimal hedge strategy in case of hedging will be to short H number of f uture contracts calculated as follows: H -Value of the Portfolio / value of the future contracts-S 325 mn /Price се of 1 index future x Multiplier) -325,000,000 50 x 2,637.72) -2, 464.25, Say 2,464 number of future contracts (rounded off to the nearest integer) Hence, the hedge strategy will be to short 2,464 numbers of index future contractsPaut2) Suppose we want to tail the hedge. In that case, optimal hedge strategy will be t o take position in the fewer number of contracts to begin with and then increase the position as we move closer to the date of expiry of the future contracts Optimal hedge ratioHedge ratio derived in part (). Beta of the portfolio - 2,464 12,240 Thus, short 2,240 numbers of future contracts and increase the position to 2,464 a s we move closer to the expiry date of futures.Part 3 Lets assume D is dividend yield. Hence under no arbitrage principle, Price of the future at t Price of Future today x (1 +w(1 -D) x t) Where I - interest rate per annum, D - Dividend yield per annum and t - time to expiry month - - 1 month 1/12 vear Hence, 2,643.25-2,637.72 x [1 +.05%-D) x 1/12] Hence D 3.5%-w(2,643.25 / 2,637.72-1) x 12 0.9842%

0 0
Add a comment
Know the answer?
Add Answer to:
You need to hedge the risk in a stock portfolio that your company owns in it's...
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for? Ask your own homework help question. Our experts will answer your question WITHIN MINUTES for Free.
Similar Homework Help Questions

  • You need to hedge the risk in a stock portfolio that your company owns in it's...

    You need to hedge the risk in a stock portfolio that your company owns in it's pension plan using the E-mini S&P500 futures contracts (that has a multiplier of 50). The current value of the portfolio is $325 million and the S&P500 is currently at 2637.72 while the futures price for the next month delivery is at 2643.25. You estimate that the beta of this portfolio is 1.1 while the beta of the S&P500 is 1. What position do you...

  • Part 1. Suppose you need to hedge the risk in a stock portfolio that your company...

    Part 1. Suppose you need to hedge the risk in a stock portfolio that your company owns in it's pension plan using the E-mini S&P500 futures contracts (which has a multiplier of 50). The current value of the portfolio is $325 million and the S&P500 is currently at 2637.72 while the futures price (for next month delivery) is at 2643.25. You estimate that the "beta" of this portfolio is 1.1 while the beta of the S&P500 is 1. What position...

  • A company has a $10 million portfolio with beta of 1.2. How can it buy the...

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

  • A fund manager has a portfolio worth $75 million. The beta of the portfolio is 1.15. She plans to use 3-month futures contracts on S&P 500 to hedge the systematic risk over the next 2 months. The current 3-month futures price is 1315, and the mu

    A fund manager has a portfolio worth $75 million. The beta of the portfolio is 1.15. She plans to use 3-month futures contracts on S&P 500 to hedge the systematic risk over the next 2 months. The current 3-month futures price is 1315, and the multiplier of the futures contract is $250 times the index. How many futures contracts should the fund manager trade in?

  • . 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.

  • A company has a $20 million portfolio with a beta of 1.2. It would like to...

    A company has a $20 million portfolio with a beta of 1.2. It would like to use futures contracts on the S&P 500 to hedge its risk. The index futures price is currently 1080, and each contract is for delivery of $250 times the index. How many short futures contracts does the company need if it wants to reduce the beta of the portfolio to 0.6?

  • Suppose you manage an equity portfolio. You are concerned that equities, as an asset class, are...

    Suppose you manage an equity portfolio. You are concerned that equities, as an asset class, are temporarily overvalued, so you implement a hedge, utilizing the S&P 500 index futures contract. Other important information is as follows: Your equity portfolio is $5M and has a beta equal to 1.5. The riskless rate is 4% per annum. The S&P 500 index is currently equal to 1,000 and has a dividend yield of 1% per annum. The S&P 500 index futures price is...

  • You own a bond portfolio and decide to hedge using futures on 10 year Treasury notes....

    You own a bond portfolio and decide to hedge using futures on 10 year Treasury notes. The futures contract has a price of $119.10 and a multiplier of $1,000. You identify a bond for delivery and use it to calculate the hedge ratio. The Treasury bond has a modified duration of 7.9. If market rates rise by 23 basis points, by how much would the Treasury note futures be expected to change in value? Be sure to include the correct...

  • 1) You want to protect the value of a $250,000,000 portfolio over next 6 months;   the...

    1) You want to protect the value of a $250,000,000 portfolio over next 6 months;   the beta of your portfolio is 1.3.   Currently the S&P futures contract with six months to expiration has a price of $3100. Questions: How many contracts you need to sell? Calculate the gain on the future contracts if S&P 500 index price declines 10% to $2790 six months later. Calculate the loss on the portfolio if S&P 500 index price declines 10% to $2790 six...

  • On July 1, an investor holds 50,000 shares of a certain stock. The market price is...

    On July 1, an investor holds 50,000 shares of a certain stock. The market price is $30 per share. The investor is interested in hedging against movements in the market over the next month and decides to use the Sept Mini S&P 500 futures contract. The index futures price is 1,500 and one contract is for delivery of $50 times the index. The beta of the stock is 1.3. How many short Sept Mini SP500 futures does the investor need...

ADVERTISEMENT
Free Homework Help App
Download From Google Play
Scan Your Homework
to Get Instant Free Answers
Need Online Homework Help?
Ask a Question
Get Answers For Free
Most questions answered within 3 hours.
ADVERTISEMENT
ADVERTISEMENT