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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.

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Trinidad Tremblay
Trinidad TremblayLv2
28 Sep 2019

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Related questions

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.

5. In early April, an insurance company portfolio manager has a stock portfolio of $200 million with a portfolio beta of 1.15. The portfolio manager plans on selling the stocks in the portfolio in June to be able to pay out funds to policyholders for annuities, and is worried about a fall in the stock market. In April, the CME Group S&P 500 Futures contract index is 2340.40 for a June futures contract ($250 multiplier for the contract).

a.What type of futures position should be taken to hedge against the stock market going down and how many future contracts are needed for this hedge?

[Hint: # contracts = [Amount Hedged / Futures Index Price x Multiplier] x Beta Portfolio

Type of Position _____________

Explain why ________________________________________

# of Contracts_____________

b. Suppose in June the stock market (S&P500 index) falls by 10% and the S&P500 futures index falls by 10% as well, what is the portfolio manager’s opportunity loss (gain) on his portfolio, and his futures gain (loss) and the net hedging result?

Spot Gain or Loss ____________ Futures Gain or Loss ___________

Net Hedging Result _____________

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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