Question: The manager of a $35 million portfolio of domestic stocks with a beta of 1.20 would like to diversify internationally. He would like to sell $7 million of domestic stock and purchase $7 million of foreign stock. He learns that the he can do this using a futures contract on a foreign stock index. The index is denominated in dollars, thereby eliminating any currency risk. He would like the beta of the new foreign asset class to be 1.15. The domestic stock index futures contract is priced at $355,000 and can be assumed to have a beta of 1. The foreign stock index futures contract is priced at $285,000 and has a beta of 1.

a. Does the manager need to buy or sell domestic stock index futures?

b. How many contracts are needed to sell $7 million of domestic stock?

c. Does the manager need to buy or sell foreign stock index futures?

d. How many contracts are need to buy $7 million of foreign stock?

Determine the value of the portfolio if the domestic stock increases by 3%, the domestic stock futures contract increases by 2.6%, the foreign stock increases by 1.7% and the foreign stock futures contract increases by 1.9%

e. What is price of one new domestic stock futures contract?

f. What is the profit or loss on the domestic futures contracts (must state if gain or loss and the amount)?

g. What is price of one new foreign stock futures contract?

h. What is the profit or loss on the foreign futures contracts (must state if gain or loss and the amount)?

i. How much does the total domestic stock increase?

j. What is the total value of the portfolio (stock and futures contracts combined)?