Question: a)When a futures contract is used for hedging. Explain why the daily settlement of the contract can give rise to cash flow problems. b)It is

a)When a futures contract is used for hedging. Explain why the daily settlement of the contract can give rise to cash flow problems.

b)It is July 16. A company has a portfolio of stocks currently worth $10 million. The beta of the

portfolio is 1.5. The company would like to double their effective portfolio beta by using the

CME December futures contract on the S&P 500 to take increased advantage of what they expect

to be a growing equity market. The S&P 500 index is currently 1654, and the S&P 500 index

futures are currently being quoted at 1667. (Note: The underlying value in one S&P Futures

contract is calculated by multiplying the futures price quote by $250 per index point.)

How many contracts would they need to take to achieve their goals? intend to go long or short in the contracts. ?

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