What are needed to find the number of stock index futures for cross-hedging a stock portfolio?
I. Standard deviation of the stock portfolio
II. Beta of the stock portfolio
III. Value of the index futures contract
IV. Value of the stock portfolio
A) I and III
B) II and IV
C) II, III and IV
D) I, II and III
E) I, II, III and IV

Question

Quizplus · Accepted Answer

To calculate the number of stock index futures necessary for cross-hedging a stock portfolio, we need the beta of the portfolio (to know the relationship between the portfolio and index futures), the value of the index futures contract (to determine the value of each contract being used for hedging), and the value of the stock portfolio (to calculate the number of contracts needed to effectively hedge the portfolio). The standard deviation of the portfolio is not necessary for this calculation. Therefore, the correct answer is C, which includes II, III, and IV.

What Are Needed to Find the Number of Stock Index