A manager is holding a $1.3 million stock portfolio with a beta of 1.1. She would like to hedge the risk of the portfolio using the S&P 500 stock index futures contract. How many dollars' worth of the index should she sell in the futures market to minimize the volatility of her position?

Question

Business

Cortez Arellano

19 December, 21:25

A manager is holding a $1.3 million stock portfolio with a beta of 1.1. She would like to hedge the risk of the portfolio using the S&P 500 stock index futures contract. How many dollars' worth of the index should she sell in the futures market to minimize the volatility of her position?

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Answers (1)

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Juliet Short · Answer 1

The correct answer to the following question is $14,30,000.

Explanation:

Given information -

Portfolio contains $1.3 million of stocks

With beta of the portfolio being - 1.1

Here manager wants to hedge the risk of his portfolio by selling the index in the futures market by entering in to an futures contract which can be defined as a contract, where both buyer and seller agrees to buy or sell a particular product in the future at a predetermined price and quantity and quality, this is a standardized contract.

Amount that manager should sell in futures = $130,00,00 x 1.1

= $ 14,30, 000