Suppose that: S&P 500 index is trading at 2000; index stocks do not pay any dividends; and you can borrow and lend at 5% per annum.
You have an index portfolio worth $20 million.
An index futures contract with a multiplier of 100 matures in a year – this means one futures contract represents an index basket of stocks with a market value of 100 times the index value.
How will you fully hedge your portfolio for a one year horizon?
What’s your return if futures are trading at 2100? 2150? 2050?
Suppose, you want to hedge only for one month.
Do you know what your return will be if index futures are trading at 2100? 2150? 2050?
Suppose your portfolio is only $300,000. Can you hedge perfectly?
Suppose your portfolio is different from the index basket of stocks – what is the quality of your hedge?