You own a portfolio which is valued at $10 million and has a beta of 1.5. You would like to create a riskless portfolio by hedging using S&P 500 futures contracts. The contract size is $250 times the index level. How many futures contracts do you need to acquire if the current S&P 500 index is 1500?
A)short 30 contracts
B)short 40 contracts
C)long 25 contracts
D)long 30 contracts
E)short 50 contracts

Question

Quizplus · Accepted Answer

To create a riskless portfolio, you need to hedge the portfolio's market risk by shorting futures contracts. The number of contracts needed is calculated as: (Portfolio Value * Portfolio Beta) / (Futures Contract Size * Index Level). Here, it is ($10,000,000 * 1.5) / ($250 * 1500) = 40 contracts. Therefore, you need to short 40 contracts.

You Own a Portfolio Which Is Valued at $10 Million