Ex 8. A future contract with 4 months to maturity is used to hedge the value of a portfolio over the next three months in the following situation: Value of S&P 500 index = 1000 S&P 500 future price = 1010 Value of portfolio =5,050,000 Risk free interest rate is 4% per annum continuously compounded Dividend yield on index is 1% per annum Beta of portfolio = 1.5 (1) What position should the investor to take to eliminate all exposure to the market over the next 3 months. (2) Suppose in 3 months, the index turns out to be $900 and the future price is 902. What is the expected value of the hedger's position?

Ex 8. A future contract with 4 months to maturity is used to hedge the value of a portfolio over the next three months in the following situation: Value of S \& P 500 index =1000 S \& P 500 future price =1010 Value of portfolio =5,050,000 Risk free interest rate is 4% per annum continuously compounded Dividend yield on index is 1% per annum Beta of portfolio =1.5 (1) What position should the investor to take to eliminate all exposure to the market over the next 3 months. (2) Suppose in 3 months, the index turns out to be $900 and the future price is 902 . What is the expected value of the hedger's position