Illustrtae what position should the fund manager

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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

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