Alex Andrew, who manages a $ 95 million large-capitalization U.S. equity portfolio, currently forecasts that equity market will decline soon. Andrew prefers to avoid the transaction coast of making sales but wants to hedge $ 15 million of the portfolio’s current value using S&P 500 futures.
Because Andrew realizes that his portfolio will not track the S&P 500 Index exactly, he performs a regression analysis on his actual portfolio returns versus the S&P futures return over the past year. The regression analysis indicates a risk-minimizing beta of 0.88 with an R2 of 0.92
FUTURES CONTRACT DATA
S&P 500 futures price 1,000
S&P 500 index 999
S&P 500 index multiplier 250
(a) Calculate the number of futures contracts required to hedge $ 15 million of Andrew’s portfolio, using the date shown. State whether the hedge is long or short. Show all calculations.
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