A. Stock Hedges You manage a well-diversified stock portfolio of $35 million with a beta of 1.6. You want to reduce the portfolio beta to 0.8 using stock index futures. The multiplier of the futures contract is 100 and the price is 1.126. Should you buy or sell contracts and how many contracts should you use? A. Buy 447 contracts b. sell 447 contracts c. sell 249 contracts d. Buy 249 contracts

B. Currently, Municipal bond yields are below T-bill yields due to their tax-exempt status. You believe the gap between US T-bond yields and municipal bond yields will narrow over the next month. How can you take advantage of such a change using municipal bond and T-bond futures contracts?

A. You currently manage a $11.5 million portfolio fully invested in equities and you believe the market is on the verge of a major but short-lived downturn. You temporarily move your portfolio to T-bills, but you don't want to incur the transaction costs of liquidating and rebuilding your equity position. Instead, you decide to temporarily protect your stock holdings with S&P index futures contracts. Should contracts be long or short? From where? If your stocks are invested in a market index fund, how many contracts should you enter? How would your answer change if the S&P 500 index is currently 1150 and the contract multiplier is $250? The beta of your portfolio is 0.6?

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A To reduce the beta of the portfolio from 16 to 08 using stock index futures you need to sell contracts as the portfolio beta needs to be decreased T... View the full answer