What is the meaning of beta

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Reference no: EM131667677

Financial Derivatives and Risk Management Assignment

Q1. It is September 1. A company knows that it will need to purchase 20,000 barrels of crude oil sometime in November. It has decided to use December oil futures to hedge the purchase price risk. Crude oil futures are traded on the NYMEX, and each contract has 1,000 barrels. Right now, the spot price of crude oil is $55 per barrel and the December futures price is $60.Please answer the following questions:

(1) Should the company take a long or short position in the futures market? Please explain.

(2) How many contracts are needed?

(3) Assume that when the company buys the crude oil in November, the spot price of crude oil rises to $61, and the December futures price becomes $65. Evaluate the hedging result. In other words, how much is the total purchase cost for 20,000 barrels of crude oil?

(4) Why hedging with futures contracts may not be perfect? Please explain.

Q2. Currently, a mutual fund manager wishes to hedge a portfolio that has a market value of $6,250,000 over the next three months using the S&P500 index futures with six months to maturity. The beta of the mutual fund portfolio is 1.50. The index futures price is 2,500. One index futures contract is on $250 times the index level. Please answer the following questions:

(1) What is the meaning of beta?

(2) What position (long or short) should the manger take? Please explain.

(3) How many contracts in the index futures contracts should the manager take to hedge the exposure to the stock market?

Reference no: EM131667677

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