USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Consider a portfolio manager with a $20,500,000 equity portfolio under management. The manager wishes to hedge against a decline in share values using stock index futures. Currently a stock index future is priced at 1250 and has a multiplier of 250. The portfolio beta is 1.25.
-Refer to Exhibit 15.10. Calculate the number of contract required to hedge the risk exposure and indicate whether the manager should be short or long.
A) 100 contracts long
B) 82 contracts short
C) 82 contracts long
D) 100 contracts short
E) 50 contracts short

Question

Quizplus · Accepted Answer

To hedge against a decline in share values, the portfolio manager will need to take a short position in stock index futures. The number of contracts required can be calculated using the following formula:

Number of contracts = (portfolio value x beta) / (index futures price x index multiplier)

Substituting the given values, we get:

Number of contracts = (20,500,000 x 1.25) / (1250 x 250) = 82

Therefore, the portfolio manager should take a short position in 82 stock index futures contracts to hedge against the risk exposure.