Question

A manager is holding a $1.3 million stock portfolio with a beta of 1.1. She would like to hedge the risk of the portfolio using the S&P 500 stock index futures contract. How many dollars’ worth of the index should she sell in the futures market to minimize the volatility of her position?

Answer 1

The correct answer to the following question is $14,30,000.

Step-by-step explanation:

Given information -

Portfolio contains $1.3 million of stocks

With beta of the portfolio being - 1.1

Here manager wants to hedge the risk of his portfolio by selling the index in the futures market by entering in to an futures contract which can be defined as a contract , where both buyer and seller agrees to buy or sell a particular product in the future at a predetermined price and quantity and quality, this is a standardized contract.

Amount that manager should sell in futures = $130,00,00 x 1.1

= $ 14,30, 000