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 managerâs 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 _____________
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 managerâs 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 _____________