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Risk Management Case

It is July 17 and a portfolio manager at NPR is concerned over the increased volatility of the market and plans to hedge his $430 million growth portfolio over the next three months. The beta of his portfolio is 1.65. The December futures contract for the S&P 500 index is currently quoted at 874.5. The value of each futures contract is 250 times the value of the index.

What actions you would take to protect the value of the portfolio over the next three months?

What is the hedge ratio?

Show what happens if the market drops by 8 % over the next three months.

Show what happens if the market advances by 5 % over the next three months.

Answer the above questions in word and upload it to dropbox.

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Elin Hessel
Elin HesselLv2
29 Sep 2019

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Related questions

A fund manager has a portfolio worth $50 million with a beta of 0.95. The manager is concerned

about the performance of the market over the next 2 months and plans to use 3-month futures

contracts on the S&P 500 to hedge the risk. The current level of the index is 2,300, one contract is on

250 times the index, the risk-free rate is 5% per annum, and the dividend yield on the index is 2%

per annum.

a) Calculate the theoretical futures price of a 3-month S&P 500 futures price.

b) How many futures contracts should the manager buy or sell to hedge the exposure to the

market over the next 2 months?

c) Calculate the value of the hedged position (stock and futures) if the index in 2 months is 2000.

A fund manager has a portfolio worth $100 million with a beta of 1.5.  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 level of the index is 2250, one contract is on 250 times the index, the risk free rate is 2%, and the        dividend yield on the index is 1.7% per year. (Assume all the rates are continuously compounded.)

 

  1. What is the theoretical futures price for the three-month futures contract?

 

  1. What position should the fund manger takes to eliminate all exposure to the market over the next two months?
  2. c) Calculate the effect of your strategy on the fund manager’s returns if the level of the market in two months is 2,000, 2,200, 2,500, 2,800, and 3,000.
Derivative Contracts
Explain how a market participant can use interest rate derivative contracts to hedge risks.
The explanation should include a description of what position the manager would take
(i.e., long or short; pay fixed or receive fixed); it is not sufficient simply to say that the
manager would “use” a contract.
(a) A lender is concerned with a decline in 3-month LIBOR. How can the lender hedge using
the Eurodollar futures contract?
(b) A borrower is concerned with an increase in 3-month LIBOR. How can the borrower
hedge using the Eurodollar futures contract?
(c) A portfolio manager is concerned with an increase in interest rates over the next quarter.
How can the manager use a Treasury bond futures contract to hedge?
(d) A portfolio manager is concerned with an increase in interest rates. How can the
manager use an interest rate swap contract to hedge?
(e) A portfolio manager is concerned with the credit risk of a corporate bond it holds
in its portfolio. How can the manager use a credit default swap to hedge the credit
risk instead of selling the corporate bond?

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