Question

Suppose you manage a \$12 million portfolio, currently all invested in equities, and you believe that the market is on the verge of a big, but short-lived, downturn. You could move your portfolio temporarily into T-bills, but you do not want to incur the tax and transaction costs of selling your stocks and re-buying them. Instead, you decide to temporarily hedge your equity holdings with S\&P 500 index futures contracts1) Should you be long or short the contracts? Why? 2) How many contracts should you enter into? The S&P 500 index futures price is now at 1286 and the contract multiplier is $250. 3) Suppose instead of reducing your portfolio beta all the way down to zero, you decide to reduce it to 0.5, how many index futures contracts should you enter into?

Answer 1

Step-by-step explanation:

1) We should short the contracts because we want to hedge our position in response to the expected downturn in the market, to neutralize our position we need to short the contracts.