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A fund manager has a Hong Kong stock portfolio worth $100 million with a beta of...
A fund manager has a Hong Kong stock portfolio worth $100 million with a beta of 1.15. The manager is concerned about the performance of the market over the next 2 months due to the recent coronavirus outbreak and plans to hedge the risk using Hang Seng Index futures. The 2- month futures price is 22,500. One contract is on $50 times the index. The initial margin is $150,000 per contract and the maintenance margin is $120,000 per contract. (a) Determine the number of futures contracts required by the hedge and whether the fund manager should long or short futures. (b) What price of the Hang Seng Index futures will lead to a margin call after entering into the transaction? (c) At the horizon date, the portfolio value falls 9%, and the Hang Seng Index futures falls to 20,800. Determine the overall profit or loss of the hedging position and comment the hedging effectiveness. (d) As an alternative strategy, what should the fund manager do if he wants to reduce the portfolio sensitivity to market risk, that is to say lowering the beta to 0.3?
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jeff jeffy answered 1 year agoRelated Solutions
A fund manager has a Hong Kong stock portfolio worth $100 million with a beta of...
A fund manager has a Hong Kong stock portfolio worth $100
million with a beta of 1.15. The manager is concerned about the
performance of the market over the next 2 months due to the recent
coronavirus outbreak and plans to hedge the risk using Hang Seng
Index futures. The 2- month futures price is 22,500. One contract
is on $50 times the index. The initial margin is $150,000 per
contract and the maintenance margin is $120,000 per contract.
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