Assume that you manage a $2 million portfolio that pays no dividends and has a beta of 1.3 and an alpha of 2% per month. Also, assume that the risk-free rate is 0.05% (per month) and the S&P 500 is at 1,500. If you expect the market to fall within the next 30 days, you can hedge your portfolio by ______ S&P 500 futures contracts (the futures contract has a multiplier of $250).
A. selling 1
B. selling 7
C. buying 1
D. buying 7
E. selling 11
B. selling 7
The hedge ratio is [$2M/(1500 × 250)] × 1.3 = 6.93. Thus, you would need to sell 7 contracts.
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