QUESTION 28

1. Using the information from the previous question:Let's suppose that we wish to hedge the portfolio using index futures. The quote for S&P 500 e-minis is 3111.75.

   If the market remains unchanged how much does our futures position increase or decrease?

   What is our total profit or loss?

QUESTION 28

1. Using the information from the previous question:Let's suppose that we wish to hedge the portfolio using index futures. The quote for S&P 500 e-minis is 3111.75.

   If the market remains unchanged how much does our futures position increase or decrease?

   What is our total profit or loss?

2. Value of Portfolio = $ 1,297,282.50

   If market drops by 6%, our portfolio will drop by = portfolio beta x % change in market portfolio

   If market drops by 6%, our portfolio will drop by = 0.905 x -6% = -5.43%

   Therefore change in portfolio value = $ 1,297,282.50 x -5.43%

   Therefore change in portfolio value = -$70,442.44

   Therefore our portfolio value = $ 1,297,282.50 - $70,442.44

   Therefore our portfolio value = $ 1,226,840.06

   % Change in put options = change in market portfolio x delta

   % Change in put options = -6% x -0.4278

   % Change in put options = +2.5668%

   Position in put options = Original portfolio value x hegde ratio

   Position in put options = 1,297,282.50 x 2.1157

   Position in put options = $2,744,660

   Therefore change in value of put options = 2,744,660 x 2.5668%

   Therefore change in value of put options = $ 70,449

   Therefore Total gain or loss = -70442 + 70,449

   Therefore Total gain or loss = $7 or Nil

   {Since portfolio is hedged, total gain must be nil. Difference of $7 is due to rounding off}