A fund manager has a portfolio worth $95 million with a beta of 1.16. The manager is concerned about theperformance of the market over the next two months and plans to use three-month futures contracts on theS&P 500 to hedge the risk. The current level of the S&P 500 index is 2,675, the risk-free rate is 2% per annum,and the dividend yield on the index is 4% per annum. The current 3-month S&P 500 index futures price is 2,660,and one contract is on 250 times the index. (a) What position should the fund manager take to eliminate all riskexposure to the market over the next two months? (B' = 0) How many three-month S&P 500 futures contractsshould the fund manager buy or sell now? (Rounding to the nearest whole number.) (b) Calculate the effect ofyour strategy on the fund manager's returns if the level of the S&P 500 index in two months is 2,585. Assumethat the 3-month S&P 500 index futures price is 2,570 in two months. What would be the expected value of thefund manager's hedged portfolio (including the spot and futures positions) in two months?

The objective of the question is to determine the number of futures contracts the fund manager…

Answered: A fund manager has a portfolio worth…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter8: Analysis Of Risk And Return

Section: Chapter Questions

Problem 15P

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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.) What is the theoretical futures price for the three-month futures contract? What position should the fund manger take to eliminate all exposure to the market over the next two months? 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.
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