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Suppose a trader is trying to hedge equity portfolio of beta 1.8 using futures on stock...

  1. Suppose a trader is trying to hedge equity portfolio of beta 1.8 using futures on stock market index. His portfolio is worth $10M today. Assume that the index futures price is $5,000 and each contract is written on 200 times the index. If he take 5 short positions in the stock market index futures, what would be the beta of hedge portfolio?

    A. 0
    B. −0.3 C. 1
    D. 1.2 E. 1.3

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Answer #1

With Short Positions,

Betat

-5 = [(betat - 1.8)/(1)](10,000,000/(5,000*200))

Betat = 1.3

So,

Option E is correct

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