You are the Chief Risk Officer of a newly-established actively managed fund with a portfolio $10...
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You are the Chief Risk Officer of a newly-established actively managed fund with a portfolio $10 million, currently all invested in equities with an investment horizon of one year only. Due to the recent geopolitical tensions, you expect the market is on the verge of a big but "short-lived" downturn. You decide to use a dynamic hedging strategy to hedge your portfolio risk with S&P500 index futures contracts on a daily basis. The cost of entering a futures contract is 0.5% of the hedge value. a. Should you long or short the index futures contracts? Explain in 50 words? b. If the beta of your portfolio is 2.0 today (day 0), how many contracts should be entered? The S&P500 index is now at 1,000 and the contract multiplier is $2,500. c. What is cost of hedging today? d. Suppose the beta of your portfolio drops to 1.5 tomorrow (day 1). To rebalance your hedged portfolio, how many contracts should be entered or sold? e. What is cost of hedging tomorrow? You are the Chief Risk Officer of a newly-established actively managed fund with a portfolio $10 million, currently all invested in equities with an investment horizon of one year only. Due to the recent geopolitical tensions, you expect the market is on the verge of a big but "short-lived" downturn. You decide to use a dynamic hedging strategy to hedge your portfolio risk with S&P500 index futures contracts on a daily basis. The cost of entering a futures contract is 0.5% of the hedge value. a. Should you long or short the index futures contracts? Explain in 50 words? b. If the beta of your portfolio is 2.0 today (day 0), how many contracts should be entered? The S&P500 index is now at 1,000 and the contract multiplier is $2,500. c. What is cost of hedging today? d. Suppose the beta of your portfolio drops to 1.5 tomorrow (day 1). To rebalance your hedged portfolio, how many contracts should be entered or sold? e. What is cost of hedging tomorrow?
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