Exhibit 21.11
Use the Information Below for the Following Problem(S)
Consider a portfolio manager with a $10,000,000 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 1350 and has a multiplier of 250. The portfolio beta is 1.50.
-Refer to Exhibit 21.11.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) 44 contracts long.
C) 44 contracts short.
D) 100 contract short.
E) None of the above.

Question

Quizplus · Accepted Answer

Since you are long the equity portfolio you should be short the stock index futures contract.
The number of contracts = [(10,000,000/(1350)(250))] × 1.5 = 44.44 contracts

Exhibit 21.11 Use the Information Below for the Following Problem(S)