Question

On March 1, a securities analyst recommended General Cinema stock as a good purchase in the early summer. The portfolio manager plans to buy 20,000 shares of the stock on June 1 but is concerned that the market as a whole will be bullish over the next three months. General Cinema's stock currently is at 32.875, and the beta is 1.10. Construct a hedge that will protect against movements in the stock market as a whole. Use the September stock index futures, which is priced at 375.30 on March 1 and which has a $500 multiplier. What is the net cost of the stock (given your hedge) if on June 1 the futures price is 387.30 and General Cinema's stock price is 38.625?

a)$36.35

b)$36.96

c)$37.02

d) $37.42

Answer 1