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1. A stock portfolio manager is currently holding a $100 million worth of stock portfolio....

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Finance

1. A stock portfolio manager is currently holding a $100 million worth of stock portfolio. She wants to add some derivatives to change the riskiness of the portfolio. The portfolio beta is 1.5. Current S&P 500 index level is 4000. The multiplier of one S&P 500 futures contract is $250.

  1. If the manager wants to completely hedge the stock position with the futures contract, how many contracts, in what direction, should be traded?

  1. Suppose the beta of the stock portfolio increases to 2. What will happen to the hedged position in part a? Specifically, what would happen to the new position if stock market crashes?

  1. The fund manager considers buying some gold spot contracts to hedge the original stock position. A gold spot has a minimum variance hedge ratio of -1.5, based on the stock index (not the portfolio). The size of a gold spot contract is $1 million per contract. How many gold spot contracts, in which direction, should the manager trade to completely hedge the stock portfolio? Assume that the stock portfolio has a beta of 1.5.

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