Determination of forward and future prices

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Reference no: EM132393559

Book- Options, Futures and other Derivatives by John C Hull. Chapter 5- determination of Forward and Future prices.

Q. Assume that you are a mutual fund manager with a total portfolio value of $100 million.

You estimate the beta of the fund to be 1.25. You would like to hedge against market movements by using stock index futures. You observe that the S&P 500 June futures are selling for 260.15 and that the index is at 258.90. Answer the following questions.

(a) How many stock index futures would you have to sell to protect against market risk?

(b) If the risk-free rate is 6% and the market risk premium is 8%, what return would you expect to make on the mutual fund? (Assuming you don't hedge.)

(c) How much would you expect to make if you hedge away all market risk?

Reference no: EM132393559

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