Problem 1: Hedging market risk using S&P500 index futures Assume you have a portfolio worth currently $5,000,000. Let portfolio beta be ß, = 2. Assume you want to hedge market risk until 3 months from now.' Current value of S&P500 index futures 3 month from now is 3,900.00. You are using mini futures i.e. $50 per point. a) If you want to completely remove market risk without using futures. What would you do? b) If you use S&P500 mini futures, how many futures you would buy to completely hedge your exposure to market risk. c) What would be the value of your new (i.e. hedged) portfolio when S&P500 goes up by 2% 3 months from now? d) What would be the value of your new portfolio when S&P500 declines by 3% 3 months from now. e) What should you do in a) if you want to change the ß of your portfolio approximately to ß = 1? f) What should you do in b) if you want to change the ß of your portfolio approximately to B = 1?
Problem 1: Hedging market risk using S&P500 index futures Assume you have a portfolio worth currently $5,000,000. Let portfolio beta be ß, = 2. Assume you want to hedge market risk until 3 months from now.' Current value of S&P500 index futures 3 month from now is 3,900.00. You are using mini futures i.e. $50 per point. a) If you want to completely remove market risk without using futures. What would you do? b) If you use S&P500 mini futures, how many futures you would buy to completely hedge your exposure to market risk. c) What would be the value of your new (i.e. hedged) portfolio when S&P500 goes up by 2% 3 months from now? d) What would be the value of your new portfolio when S&P500 declines by 3% 3 months from now. e) What should you do in a) if you want to change the ß of your portfolio approximately to ß = 1? f) What should you do in b) if you want to change the ß of your portfolio approximately to B = 1?
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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Transcribed Image Text:Problem 1: Hedging market risk using S&P500 index futures
Assume you have a portfolio worth currently $5,000,000. Let portfolio beta be ß, = 2.
Assume you want to hedge market risk until 3 months from now.' Current value of S&P500 index
futures 3 month from now is 3,900.00. You are using mini futures i.e. $50 per point.
a) If you want to completely remove market risk without using futures. What would you do?
b) If you use S&P500 mini futures, how many futures you would buy to completely hedge
your exposure to market risk.
c) What would be the value of your new (i.e. hedged) portfolio when S&P500 goes up by
2% 3 months from now?
d) What would be the value of your new portfolio when S&P500 declines by 3% 3 months
from now.
e) What should you do in a) if you want to change the ß of your portfolio approximately to
ß = 1?
f) What should you do in b) if you want to change the ß of your portfolio approximately to
B = 1?
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