A company has a $36 million portfolio with a beta of 1.2. The futures price for a contract on the S&P 500 index expiring next month is equal to $900. Futures contracts can be traded on 250 times the index. The risk free rate is 6% per annum and dividend yield for the index is 3%.

What trade is necessary to achieve the following?

(i) Eliminate all systematic risk in the portfolio for the next month.

(ii) Reduce the beta 0.9

(iii) Increase beta to 1.8

Assuming you follow a hedging strategy aiming to eliminate all systematic risk, what do you expect the hedge effectiveness to be if S & P 500 is equal to $1000 in a month? Assume that during that time the value of your portfolio went up by 17%.

Answer rating: 100% (QA)

i Eliminate all systematic risk in the portfolio for the next mo... View the full answer