(c) (10 pts) Suppose that the fund manager just shorted another portfolio worth of $10 million...

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(c) (10 pts) Suppose that the fund manager just shorted another portfolio worth of $10 million with a beta of 1.2, what position in the futures should the fund manager take now to make the combined portfolio market-neutral again? (Assuming the index futures price is 2350, and the value of your portfolio is $51 million, as in question (b)) Answer: The beta of the combined portfolio is (10*(-1.2)+51*(-0.8))/(10+51)=-0.87 The number of index futures contracts to long = 61*0.87/(250*2350)=90 contracts. 4. A fund manager has just shorted a portfolio worth of $50 million with a beta of 0.8. The manager would like to achieve a market-neutral position by trading on 3-month futures contracts on the S&P 500. The current 3-month futures price is 2280. One contract consists of 250 times the index. (a) (10 pts) What position (ie. the number of contracts) should the fund manager take to eliminate all exposure to the market over the next 2 months? Should he long or short futures? Answer: The manager should long the S&P 500 index futures to make the portfolio market-neutral. The number of contracts = 0.8*50million/(250*2280)=70 contracts (b) (10 pts) Calculate the effect of your strategy on the fund manager's returns if the futures prices of S&P 500 increases to 2350 and his portfolio's value increases to $51 million. Shorting the portfolio will lose $1million. Long the S&P 500 index will gain money. Gain from longing the index futures =70million*250*(2350-2280)=$1,225,000 Net gain from the combined position = $225,000 (c) (10 pts) Suppose that the fund manager just shorted another portfolio worth of $10 million with a beta of 1.2, what position in the futures should the fund manager take now to make the combined portfolio market-neutral again? (Assuming the index futures price is 2350, and the value of your portfolio is $51 million, as in question (b)) Answer: The beta of the combined portfolio is (10*(-1.2)+51*(-0.8))/(10+51)=-0.87 The number of index futures contracts to long = 61*0.87/(250*2350)=90 contracts. 4. A fund manager has just shorted a portfolio worth of $50 million with a beta of 0.8. The manager would like to achieve a market-neutral position by trading on 3-month futures contracts on the S&P 500. The current 3-month futures price is 2280. One contract consists of 250 times the index. (a) (10 pts) What position (ie. the number of contracts) should the fund manager take to eliminate all exposure to the market over the next 2 months? Should he long or short futures? Answer: The manager should long the S&P 500 index futures to make the portfolio market-neutral. The number of contracts = 0.8*50million/(250*2280)=70 contracts (b) (10 pts) Calculate the effect of your strategy on the fund manager's returns if the futures prices of S&P 500 increases to 2350 and his portfolio's value increases to $51 million. Shorting the portfolio will lose $1million. Long the S&P 500 index will gain money. Gain from longing the index futures =70million*250*(2350-2280)=$1,225,000 Net gain from the combined position = $225,000

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a To eliminate all exposure to the market over the next 2 months and achieve a marketneutral positio... View the full answer