Index futures are often used to hedge portfolios

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Reference no: EM132019233

Index futures are often used to hedge portfolios that are not exactly the index. This is called cross-hedging. Suppose that we have a portfolio that is not the S&P 500, and we wish to shift the portfolio into T-bills. Assume that the portfolio and the S&P 500 are perfectly correlated. Suppose that we own $200 million of stocks with a beta relative to the S&P 500 of 1.2. Assume that the S&P 500 is 1200 with a zero dividend yield and the effective annual rate of 10%.

(a) Find the future price

(b) You believe that the S&P 500 index price will drop in the future and you decide to hedge your portfolio. You need to short some quantity of the S&P 500. How many S&P 500 index futures can you short?

Reference no: EM132019233

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