8. Alex Andrew, who manages a $95 million large-capitalization U.S. equity portfolio, cur-rently forecasts that equity markets will decline soon. Andrew prefers to avoid the trans-action costs of making sales but wants to hedge $15 million of the portfolio's currentvalue using S&P 500 futures.Because Andrew realizes that his portfolio will not track the S&P 500 Index exactly, heperforms a regression analysis on his actual portfolio returns versus the S&P futuresreturns over the past year. The regression analysis indicates a risk-minimizing beta of0.88 with a correlation coefficient of 0.96.Futures Contract DataS&P 500 futures price1,000S&P 500 index999S&P 500 index multiplier250a. Calculate the number of futures contracts required to hedge $15 million of Andrew'sportfolio, using the data shown. State whether the hedge is long or short. Show allcalculations.b. Identify two alternative methods (other than selling securities from the portfolio orusing futures) that replicate the strategy in part (a). Contract each of these methodswith the futures strategy.

Part a:We can determine the number of futures contracts required to hedge $15 million of the…

Answered: 8. Alex Andrew, who manages a $95…

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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