An investment fund wants to reduce the market risk of its equity portfolio over the next six
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An investment fund wants to reduce the market risk of its equity portfolio over the next six months. The portfolio is invested entirely in U.S. stocks, has a beta of 1.37 against the S&P 500 index, and has a current market value of $22,500,000. The fund’s target beta is 0.45. The current futures index level for the 6-month S&P 500 E-mini futures contract is 4,415 and the multiplier for the S&P 500 E-mini futures contract is $50. Recommend a cross-hedge using 6-month S&P 500 E-mini futures. Should you go long or short to hedge the fund’s stock portfolio? How many contracts should you use?
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