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On July 1, an investor holds 50,000 shares of a certain stock. The market price is $30 per share. The investor is interested in hedging against movements in the market over the next month and decides to use the September Mini S&P 500 futures contract. The index is currently 1,500 and one contract is for delivery of $50 times the index. The beta of the stock is 1.3.

What strategy should the investor follow?

Respuesta :

Answer:

The strategy the investor should follow is to short the September Mini S&P 500 futures contract by 26

Explanation:

Parameters:

Portfolio value= P = 50,000 * 30 = $1,500,000

Beta of stock  β  = 1.3

Index price = 1,500

Multiplier = $50

Futures Value A = 1,500*50 = $75,000

The formula to calculate number of contract N;

N= β ∗ P/A

N= 1.3*1,500,000/75,000

N= 26

The strategy the investor should follow is to short the September Mini S&P 500 futures contract by 26

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