Question: You are in charge of managing a $45.6 million equity portfolio and believe that the market is on about to witness a massive downturn. You are contemplating as to whether or not to move your portfolio temporarily into safe treasury bills and government bonds, but you do not want to incur the transaction costs of liquidating and re-establishing your equity position. Instead, you have decided to temporarily hedge your equity holdings with E-mini Dow Jones index futures contracts. a) Given the scenario, should you go long or should you short the contracts? Explain your position very briefly. b) The Dow Jones index is now at 1029. If your equity holdings are invested in a market-index fund, exactly how many contracts should you enter given that the contract multiplier is $325? (Round your answer to one decimal place). c) Explain and illustrate how does your answer to (b) is expected to change if the beta of your portfolio is 0.5, (if there are any changes that is).
Question: You are in charge of managing a $45.6 million equity portfolio and believe that the market is on about to witness a massive downturn. You are contemplating as to whether or not to move your portfolio temporarily into safe treasury bills and government bonds, but you do not want to incur the transaction costs of liquidating and re-establishing your equity position. Instead, you have decided to temporarily hedge your equity holdings with E-mini Dow Jones index futures contracts. a) Given the scenario, should you go long or should you short the contracts? Explain your position very briefly. b) The Dow Jones index is now at 1029. If your equity holdings are invested in a market-index fund, exactly how many contracts should you enter given that the contract multiplier is $325? (Round your answer to one decimal place). c) Explain and illustrate how does your answer to (b) is expected to change if the beta of your portfolio is 0.5, (if there are any changes that is).
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:Question: You are in charge of managing a $45.6 million equity portfolio and believe that
the market is on about to witness a massive downturn. You are contemplating as to
whether or not to move your portfolio temporarily into safe treasury bills and
government bonds, but you do not want to incur the transaction costs of liquidating and
re-establishing your equity position. Instead, you have decided to temporarily hedge
your equity holdings with E-mini Dow Jones index futures contracts.
a) Given the scenario, should you go long or should you short the contracts? Explain
your position very briefly.
b) The Dow Jones index is now at 1029. If your equity holdings are invested in a
market-index fund, exactly how many contracts should you enter given that the
contract multiplier is $325? (Round your answer to one decimal place).
c) Explain and illustrate how does your answer to (b) is expected to change if the beta
of your portfolio is 0.5, (if there are any changes that is).
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