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Question: You manage a $16.5 million portfolio, currently all invested in equities, and believe that the market is on the verge of a big but short-lived downturn. You would move your portfolio-temporarily into T-bills, but you do not want to incur the transaction costs of liquidating and reestablishing your equity position. Instead, you decide to temporarily hedge your equity. holdings with S&P 500 index futures contracts.

a. Should you be long or short the contracts? Why?

b. If your equity holdings are invested in a market-index fund (beta = 1), into how many contracts should you enter? The S&P 500index is now at 1, 650 and the contract multiplier is. $250. How does your answer to (b) change if the beta-of your portfolio is 6?

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Basic Finance, Finance

Category:- Basic Finance
Reference No.:- M92819985

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