You manage a $ 13.5 million portfolio, currently all invested in equities, and believe that you have extraordinary market- timing skills. You believe that the market is on the verge of a big but short- lived downturn; you would move your portfolio temporarily into T- bills, but you do not want to incur the transaction costs of liquidating and reestablishing your equity position. Instead, you decide to temporarily hedge your equity holdings with S& P 500 index futures contracts.

a. Should you be long or short the contracts? Why?

b. If your equity holdings are invested in a market index fund, into how many contracts should you enter? The S& P 500 index is now at 1,350 and the contract multiplier is $ 250.

c. How does your answer to (b) change if the beta of your portfolio is .6?