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30 November, 02:19

You are given the following information about a portfolio you are to manage. For the long term, you are bullish, but you think the market may fall over the next month. Portfolio Value $ 1 million Portfolio's Beta 0.60 Current S&P500 Value 1400 Anticipated S&P500 Value 1200 How many contracts should you buy or sell to hedge your position? Allow fractions of contracts in your answer. sell 11.235 buy 1.714 buy 4.236 sell 4.236 sell 1.714

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  1. 30 November, 04:41
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    sell 1.714

    Explanation:

    The computation of the number of contract buy or sold to hedge the position is shown below:

    As we know that

    Number of contracts = Hedge Ratio

    Hedge Ratio = Change in Portfolio Value : Profit on one future contract

    where,

    Change in the value of the portfolio is

    For that we need to do following calculations

    Expected Drop in Index is

    = (1200 - 1400) : 1400

    = - 14.29%

    And, Expected Loss on the portfolio is

    = Beta * Expected index drop

    = 0.60 * (-14.29%)

    = - 8.57%

    So, the change is

    = 1000000 * (-8.57%)

    = - $85,700

    And, the profit is

    = 200 * 250 multiplier

    = 50,000

    So, the hedging position is

    = - $85,700 : 50,000

    = - 1.714

    This reflects the selling position
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