Question

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 to hedge the market risk?

Answer 1

No of contracts to be shorted = (Total exposure x beta) / (Index future price x multiplier)

Total exposure = No of shares x market price per share

=50000 x 30

=1500,000 $

Beta = 1.3 Index price = 1500$ and multiplier = 50

Thus No of contracts to be shorted = (1500,000 * 1.3) / (1500 x 50)

=1950000/75000

=26 contracts