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A large-cap value equity manager has an $8,000,000 equity portfolio with beta of 0.76. The S&P 500 futures contracts...

A large-cap value equity manager has an $8,000,000 equity portfolio with beta of 0.76. The S&P 500 futures contracts is available with a current value of 2,880 and a multiplier of $250. What position should the manger take to completely hedge the portfolio’s market risk? A. Short 8 contracts. B. Short 11 contracts. C. Short 22 contracts. D. Long 11 contracts.

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Answer #1

A. Short 8 Contracts

Current Portfolio Value = $8,000,000

Portfolio Beta = 0.76

Current value of S&P 500 Future = 2,880

Multiplier of Future = $250

Value of One Future Contract = 2,880*250 = $720,000

Equity Portfolio has long position thus to hedge manager has to take short position in Future.

No. of Future contract to short for complete hedging can be computed with following equation:

Current value of Portfolio*Beta Short Future Value of one future contract

8,000,000*0.76 Short Future 720,000

6,080,000 Short Future 720,000

Short Future = 8.44

Short Future 8 contracts

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