a) What is the difference between a stock and a strip hedge?

b) How do Beta and hedge ratio relate to each other?

c) Determine the hedge ratio for a stock portfolio that has a beta of 0.80 relative to the S&P 500. The S&P 500 is currently at 3800 and pays a 2.5% dividend yield. The hedge will be for six months (1/2 year) and the current annual risk-free rate is 1.00%.

d) Using the information from above, if the S&P 500 Futures contract is trading at 3800 (contract value = $50 x current price) and the portfolio holds $60,000,000 in stocks what would be the number of S&P 500 Futures contracts sold to hedge the portfolio?

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Profit / Loss of Strip Hedge Using Farther Dated Contract P₁ (Strip) = ST + (F - F7 )= F2 + (St − F7 ) ST= Underlying Market F² = Futures at Hedge Initiation F² = Futures at Hedge Being Taken off Formula Showing Strike Versus Stack Hedge Pr (Strip) - Pr (Stack) = (F - F2)-(F) – F?) Fo¹ = Near Expiration Futures at Hedge Initiation Fo² = Far Expiration Futures at Rolling Date F¹ = Near Expiration Futures at Hedge Rolling Date F₁² = Far Expiration Futures at Rolling Date Formula Solved for the Hedge Ratio - AV Portfolio Change AS Security Price Change AF Futures Price Change h = Hedge Ratio h= AV - AS AF Profit/ Loss of Stack Hedge With Rolling Transaction P₁ (Stack) = ST +(F - F') + (F? − F7 ) = F − (F} − F²) + (S, − F7) ST Underlying Market 1 Fo¹ = Near Expiration Futures at Hedge Initiation F¹ = Near Expiration Futures at Rolling Date Far Expiration Futures at Rolling Date Fr² = Far Expiration Futures upon Exiting Hedge Ft Formula Showing Portfolio Value Change - AV = Portfolio Change AS Security Price Change AF = Futures Price Change h = Hedge Ratio AV=AS+hAF Using the Hedge Ratio to Determine Number of Contracts ▸ Hedge Ratio = -0.902 ▸ Portfolio Size = $50,000,000 ▸ S&P 500 is trading at 1350.00 ▸ S&P 500 futures also at 1350.00 ▸ Value of S&P 500 Futures contract = 1350 x 50 = 67,500 n = h Value Hedged Contract Size Profit / Loss of Strip Hedge Using Farther Dated Contract P₁ (Strip) = ST + (F - F7 )= F2 + (St − F7 ) ST= Underlying Market F² = Futures at Hedge Initiation F² = Futures at Hedge Being Taken off Formula Showing Strike Versus Stack Hedge Pr (Strip) - Pr (Stack) = (F - F2)-(F) – F?) Fo¹ = Near Expiration Futures at Hedge Initiation Fo² = Far Expiration Futures at Rolling Date F¹ = Near Expiration Futures at Hedge Rolling Date F₁² = Far Expiration Futures at Rolling Date Formula Solved for the Hedge Ratio - AV Portfolio Change AS Security Price Change AF Futures Price Change h = Hedge Ratio h= AV - AS AF Profit/ Loss of Stack Hedge With Rolling Transaction P₁ (Stack) = ST +(F - F') + (F? − F7 ) = F − (F} − F²) + (S, − F7) ST Underlying Market 1 Fo¹ = Near Expiration Futures at Hedge Initiation F¹ = Near Expiration Futures at Rolling Date Far Expiration Futures at Rolling Date Fr² = Far Expiration Futures upon Exiting Hedge Ft Formula Showing Portfolio Value Change - AV = Portfolio Change AS Security Price Change AF = Futures Price Change h = Hedge Ratio AV=AS+hAF Using the Hedge Ratio to Determine Number of Contracts ▸ Hedge Ratio = -0.902 ▸ Portfolio Size = $50,000,000 ▸ S&P 500 is trading at 1350.00 ▸ S&P 500 futures also at 1350.00 ▸ Value of S&P 500 Futures contract = 1350 x 50 = 67,500 n = h Value Hedged Contract Size

Answer rating: 100% (QA)

a A stock hedge is created when an investor buys or sells a security in order to offs... View the full answer