a]
number of contracts to short = (value of portfolio * beta) / (F1 * contract size)
number of contracts to short = ($5.05 million * 1.5) / (1010 * $250) = 30
b]
Loss on stock portfolio = % decrease in SP500 * beginning value of stock portfolio
% decrease in SP500 = (900 - 1010) / 1010 = -10.89%
Loss on stock portfolio = -10.89% * $5.05 million = $549,945
Gain on futures position = number of contracts shorted * (F1 - F2) * contract size = 30 * (1010 - 902) * 250 = $810,000
Overall portfolio gain = $810,000 - $549,945 = $260,055
2. In this problem you will use SP500 index futures to hedge against risks in your...
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