Homework Answers
Ans.
The expected loss on the portfolio = Anticipated Value - Current Value / Current Value
= (925 - 1,000)/ 1,000 * 0.8 = 6%
The dollar value of loss = ( Portfolio Value * Loss % ) $ 1,000,000 * 6% = $ 60,000.
The change is 75 points times ( 1,000 - 925 ) the $250 multiplier, which equals $18,750
The number of contracts equals the hedge ratio
= Change in portfolio value / Profit on one futures contract = $60,000/ $18,750 = 3.200
And we have to sell the contract because the futures contract value will rise when the market
falls and the decline in the portfolio's value will be offset by this.
So the correct ans is Option A. Sell 3.2000
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