Question: You are the manager of a stock portfolio worth $8,750,500 and a beta of 1.05. During the next 5 months, you expect a correction in the market that will take the market down about 8%. Your portfolio is expected to fall 8.4% (1.05*8%). So, you want to lower your beta to 1. A stock index futures contract with the appropriate expiration is priced at 420.25 with a $500 multiplier.
a. If the stock portfolio manager is concerned about a market correction of 8%, should the manager buy or sell a stock index futures contact?
b. At initiation, how much is one futures contract worth?
c. How many futures contracts should the manager buy or sell (round up)?
In 3 months, the portfolio value has fallen to $8,170,000 and the futures price is 401.15.
d. How much is one futures contract worth?
e. What is the profit or loss on the stock portfolio (must state if gain or loss and the amount)?
f. What is the profit or loss on the futures contract (must state if gain or loss and the amount)?
g. What is the net gain or loss on the combined stock portfolio and the futures contracts (must state if gain or loss and the amount)?