You manage a portfolio worth $16.7 million, currently all invested in equities, and believe that the market is on the verge of a big but short-lived downturn. You would move your portfolio temporarily into T-bills, but you do not want to incur the transaction costs of liquidating and reestablishing your equity position. Instead, you decide to temporarily hedge your equity holdings with E-mini S&P 500 index futures contracts. a. Should you be long or short the contracts?

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Business

Lexie Small

24 July, 00:51

You manage a portfolio worth $16.7 million, currently all invested in equities, and believe that the market is on the verge of a big but short-lived downturn. You would move your portfolio temporarily into T-bills, but you do not want to incur the transaction costs of liquidating and reestablishing your equity position. Instead, you decide to temporarily hedge your equity holdings with E-mini S&P 500 index futures contracts. a. Should you be long or short the contracts?

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Nylah Hammond · Answer 1

Short

Explanation:

Given that

Worth of the portfolio = $16.7 million

Moreover, it does not incurred the transaction cost with related to the liquidating and reestablishing the equity position

So for temporarily hedge your equity holdings with E-mini S&P 500 index future contracts we should go for short contracts so that it hedges the portfolio with a view to minimize the risk in order to reduce the impact adverse of price fluctuations in another