You are a fund manager at Pershing TP Capital Management right after graduation. You have a portfolio worth $50 million with a beta of 0.87. The manager is concerned about the performance of the market over the next two months and plans to use three-month futures contracts on a welldiversified index to hedge its risk. The current level of the index is 1250, one contract is on 250 times the index, the risk-free rate is 6% per annum, and the dividend yield on the index is 3% per annum. The current 3 month futures price is 1259.

a. [5 points] You want to eliminate all exposure to the market over the next two months. Should you long or short futures contract? Please state the intuition clearly.

b. [5 Points] How many units of futures contract should you short or long, in order to eliminate all exposure to the market over the next two months?

c. [10 points] If the level of the market index in two months is 1,000, and the 1-month futures price in two months is 1,002.50, calculate the gain/losses in dollars over this two-month period from (1) your futures position, (2) your stock position, (3) total position.