Calculate the effect of your strategy on the fund manager’s returns if the level of the market in five months is 2,950 and one-month futures price is 1% higher than the index level in five months.
A fund manager has a portfolio worth $55 million with a beta of 1.37. The manager is concerned
about the performance of the market over the next five months and plans to use six-month futures
contracts on the S&P 500 to hedge the risk. The current level of the index is 3,000, one contract is
on 250 times the index, the risk-free rate is 5% per annum, and the dividend yield on the index is
3% per annum. The current 6-month futures price is 3,030. The fund manager takes a position in
S&P 500 index futures to eliminate half of the exposure to the market over the next five months.
Calculate the effect of your strategy on the fund manager’s returns if the level of the market in five
months is 2,950 and one-month futures price is 1% higher than the index level in five months.
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