How many contracts are needed to hedge your portfolio

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(a) You manage a $100 million stock portfolio with a beta of 0.80. Given a contract size of $100,000 for a stock index futures contract, how many contracts are needed to hedge your portfolio?

(b) Suppose a futures contract exists on IBM stock, which is currently selling at $90 per share. The contract matures in three months, the risk-free rate is 6 percent annually, and the current dividend yield on the stock is 4 percent. What does the parity relationship imply the futures price should be?

(c) Explain the following terminology with regard to futures trading; (i) Marking-to-market (ii) Reverse trade (iii) Carrying charge market (iv) Spot-futures parity.

Reference no: EM131886274

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