An investor owns a portfolio of ETFs that is highly correlated with the S&P 500 composite index (Correlation 1.00). The current vaue of the portfolio is $140,000. The short-term outlook for the S&P 500 is bearish. You are looking for a decline in the S&P 500 index and, therefore, decide to buy the December S&P 500 futures.
Time frame: It is now early November
Current S&P 500 futures (Dec futures): 1,415.00 pts
Correlation of ETF portfolio to S&P index is 1.
Portfolio beta equals 1.
S&P futures Mini's have a tick value of $50.
Assume that in 3 weeks the S&P 500 declines by 15% and the December futures decline to 1195.00.
Required:
1. Is this a short or long hedge i.e. do you sell or buy the futures contract?
2. Compute the number of futures contracts needed for the hedge.
3. Compute the profit or loss on the portfolio as a result of the hedge.
4. Compute the value of the portfolio as a result of the hedge.