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
Related questions
Question
Hi! I am trying to continue this question, please do parts D-F.
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?
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 4 steps with 3 images
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Recommended textbooks for you
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education