The S&P 500 just closed at 2500 (T=0) and has a continuously compounded (CC) annual dividend yield of 2.0%. The OIS indicates the appropriate (CC) risk free rate is 3.0% per annum. A PM has $200M AUM with beta of 1.30 and wants to reduce the portfolio’s market risk to the same amount of systematic risk as the S&P 500 for 1.0 years using index futures (which have a multiplier of 250). What action should the PM take? HINT: You will need to calculate the futures price of the index.
A) Sell 412 index futures contracts
B) Sell 95 index futures contracts
C) Sell 93 index futures contracts
D) Sell 91 index futures contracts
E) Buy 412 index futures contracts