The manager of a well-diversified portfolio with a market value of $200 million that mirrors the S&P 500 wants to hedge the portfolio against a market decline in value over the next six months. The portfolio manager wants to use the Mini-S&P 500 contract for hedging. The contract multiplier for this futures contract is $50. The futures price for the contract at the date that the hedge is put on is 4,200.

a. Should the portfolio manager buy or sell the futures contract. Explain why.

b. How many contracts should the portfolio manager sell or buy?

c. Suppose at the delivery date (six months from now), the value of the S&P 500 is 3,800. Show what the outcome for this hedge will be.

Answer rating: 100% (QA)

Step 1 Step 1 a The portfolio manager should sell the futures contract because selling at higher pri... View the full answer