The fund manager would like to reduce the market risk exposure by selling shares. Why is it impracticable to do so? Explain in details what hedging strategy you would recommend the hedge fund. Give reasons for your choice of derivatives contracts.

 

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RedRock, a Hong Kong based hedge fund manager specialising in technology investment, is holding an aggregate portfolio of HK and US stocks. The manager expects the stock market as a whole to have a correction over the following two to three weeks. Details of the portfolio are given as of 28 February 2022. USD/HKD exchange rate is quoted at 7.8000. Stock Code 0005 0388 0700 1810 2269 2318 2382 3690 9618 9988 AAPL AMZN FB GOOG IBM INTC MSFT MRNA TSLA TWTR Stock Name HSBC HKEX Tencent Xiaomi Wuxi Biologics Ping An Insurance Sunny Optical Meituan JD.com Alibaba Apple Amazon Meta Platforms Alphabet IBM Intel Microsoft Moderna Tesla Twitter Futures Contract Hang Seng Index Hang Seng TECH Index Hang Seng China Enterprises Index Currency Price HKD HKD HKD HKD HKD HKD HKD HKD HKD HKD E-Mini S&P 500 E-Mini Nasdaq-100 E-Mini Dow Jones Industrial USD USD USD USD USD USD USD USD USD USD 54.10 377.60 421.20 14.66 109.40 60.40 186.70 172.20 279.20 104.20 165.12 3,071.26 211.03 2,697.82 122.51 47.70 298.79 153.60 870.43 35.55 4,373.75 14,237.81 33,892.60 Market Cap. (B) No. of Shares Beta 1,096.00 478.74 22,657 5,126 8,031 4,046.00 366.03 64.25 4,370 14,218.00 33,843.00 1,133.00 204.78 1,056.00 871.07 2,240.00 2,659.00 1,563.00 574.41 1,783.00 The following prices obtained from the futures markets as of 28 February 2022. The contract specifications and other relevant information can be found in the Hong Kong Exchange and Clearing website, www.hkex.com.hk, and the CME Group website, www.cmegroup.com. 194.23 220.94 2,240.00 62.28 899.60 28.46 300,000 0.58 30,000 0.90 30,000 0.49 800,000 1.40 600,000 1.08 500,000 0.93 100,000 1.01 Spot Mar-2022 Apr-2022 Jun-2022 Sep-2022 22,713 5,113 8,024 50,000 1.00 50,000 0.69 100,000 0.83 22,648 5,128 8,036 20,000 1.19 1,000 1.13 10,000 1.29 1,500 1.03 23,000 1.09 49,000 0.54 13,000 0.89 10,000 1.48 4,000 2.01 50,000 0.75 22,383 5,133 7,941 4,362 14,210.00 33,744.00 22,162 5,136 7,856 4,360 14,200.00 33,435.00 RedRock, a Hong Kong based hedge fund manager specialising in technology investment, is holding an aggregate portfolio of HK and US stocks. The manager expects the stock market as a whole to have a correction over the following two to three weeks. Details of the portfolio are given as of 28 February 2022. USD/HKD exchange rate is quoted at 7.8000. Stock Code 0005 0388 0700 1810 2269 2318 2382 3690 9618 9988 AAPL AMZN FB GOOG IBM INTC MSFT MRNA TSLA TWTR Stock Name HSBC HKEX Tencent Xiaomi Wuxi Biologics Ping An Insurance Sunny Optical Meituan JD.com Alibaba Apple Amazon Meta Platforms Alphabet IBM Intel Microsoft Moderna Tesla Twitter Futures Contract Hang Seng Index Hang Seng TECH Index Hang Seng China Enterprises Index Currency Price HKD HKD HKD HKD HKD HKD HKD HKD HKD HKD E-Mini S&P 500 E-Mini Nasdaq-100 E-Mini Dow Jones Industrial USD USD USD USD USD USD USD USD USD USD 54.10 377.60 421.20 14.66 109.40 60.40 186.70 172.20 279.20 104.20 165.12 3,071.26 211.03 2,697.82 122.51 47.70 298.79 153.60 870.43 35.55 4,373.75 14,237.81 33,892.60 Market Cap. (B) No. of Shares Beta 1,096.00 478.74 22,657 5,126 8,031 4,046.00 366.03 64.25 4,370 14,218.00 33,843.00 1,133.00 204.78 1,056.00 871.07 2,240.00 2,659.00 1,563.00 574.41 1,783.00 The following prices obtained from the futures markets as of 28 February 2022. The contract specifications and other relevant information can be found in the Hong Kong Exchange and Clearing website, www.hkex.com.hk, and the CME Group website, www.cmegroup.com. 194.23 220.94 2,240.00 62.28 899.60 28.46 300,000 0.58 30,000 0.90 30,000 0.49 800,000 1.40 600,000 1.08 500,000 0.93 100,000 1.01 Spot Mar-2022 Apr-2022 Jun-2022 Sep-2022 22,713 5,113 8,024 50,000 1.00 50,000 0.69 100,000 0.83 22,648 5,128 8,036 20,000 1.19 1,000 1.13 10,000 1.29 1,500 1.03 23,000 1.09 49,000 0.54 13,000 0.89 10,000 1.48 4,000 2.01 50,000 0.75 22,383 5,133 7,941 4,362 14,210.00 33,744.00 22,162 5,136 7,856 4,360 14,200.00 33,435.00

Answer rating: 100% (QA)

To reduce market risk exposure RedRock the hedge fund manager can implement a hedging strategy using index futures contracts Since RedRock expects the ... View the full answer