Illustrtae what position should the fund manager

Reference no: EM1332493

Important information about Hedging portfolio using futures

A fund manager has a portfolio worth $100 million with a beta of 1.20. The manager is concerned about the performance of the market over the next two months and plans to use three-month futures contracts on the S&P 500 to hedge the risk. The current index level is 850 and one futures contract is on 250 times the index (i.e., the index multiplier is 250). The risk-free rate is 6.0% per annum and the dividend yield on the index is 3.0% per annum. The current three-month futures price is 852.34.

Q1: What position should the fund manager take to hedge exposure to the market over the next two months?

Q2: Calculate the effect of your strategy on the fund manager's returns if the index in two months is 700, 800, 900, 1,000 and 1,100. Assume that the one-month futures price is 0.25% higher than the index level at this time (note, that means if the index is 900 two months from now, the one-month futures price will be 1.0025*900 = 902.25).

Reference no: EM1332493

Questions Cloud

Description of dominant strategy : Write down the major ways that the risks of exchange rate changes can be hedged against? What are the ways a multinational corporation can reposition its funds to increase its profits?

How to handle the customervalidator''s servervalidate event : Write down a method that handles the CustomerValidator's ServerValidate event. In addition, write a JavaScript function for the CustomValidator's CustomValidationFunction property.

How can management foster a guest service culture : What is hospitality management and Why is service so critical in hospitality management and How can management foster a guest service culture

The opportunities and threats of a firm : Discuss the opportunities and threats of a firm which employs a single or dominant product business model?

Illustrtae what position should the fund manager : Illustrtae what position should the fund manager take to hedge exposure to the market over the next two months.

Forces influence the organization-s structure and culture : In what way does the need to manage these forces influence the organization's structure and culture?

Benefits and changes with technology : Employee Training and Development - Benefits and changes with technology

Test current events and choose a risky decision : Test current events and choose a risky decision

Office building maintenance makes call for the stripping : Office building maintenance makes call for the stripping, waxing, and buffing of ceramic floor tiles. This work is often contracted out to office maintenance firms, and both technology.

User Account

All Pages