Question

A company has a $36 million portfolio with a beta of 1.2. The futures price for a contract on an index is 900. Futures contracts on $250 times the index can be traded. What trade is necessary to reduce beta to 0.9 (how many contracts should be shorted)?

Answer 1

Short of 48 contracts.

Step-by-step explanation:

What trade is necessary to reduce beta to 0.9?

Number of contract to be shortened = (0.9 - 1.2) * 36,000,000 / (900*$250)

= -0.3*36,000,000 / 225,000

= -10,800,000 / 225,000

= -48

As it is of negative value, it should be short of 48 contracts.