Question

A fund manager has a portfolio worth $10 million with a beta of 0.85. The manager is concerned about the performance of the market over the next months and plans to use 3-month futures contracts on the S&P 500 to hedge the risk. The current level of the index is 2,800, one contract is 250 times the index, the risk-free rate is 3% per annum, and the dividend yield on the index is 1% per annum.

a) Calculate the theoretical futures price of a 3-month S&P 500 futures price.

b) How many futures contracts should the manager buy or sell (round to the nearest whole number) to hedge the exposure to the market over the next 2 months?

c) Calculate the value of the hedged position (stock and futures) if the index in 1 months is 2500.

Answer 1

I have answered the question below

Please up vote for the same and thanks!!!

Do reach out in the comments for any queries

Answer: