You are given the following information about a portfolio you are to manage. For the long term, you are bullish, but you think the market may fall over the next month. Portfolio Value $ 1 million Portfolio's Beta 0.60 Current S&P500 Value 990 Anticipated S&P500 Value 915
1. What is the dollar value of your expected loss?
A. $142,900
B. $65,200
C. $85,700
D. $30,000
E. $64,200
2. How many S&P contracts should you buy or sell to hedge your position? (Not the e-mini but the standard S&P 500 contract) Allow fractions of contracts in your answer.
A. sell 3.477
B. buy 3.477
C. sell 4.236
D. buy 4.236
E. sell 11.235

C. $85,700

number of contracts to hedge =2.4242

Explanation:

Here we are working with a standard contract so our multiplier will be $250

1. We first calculate expected drop in index

Expected Drop in Index = (1200-1400)/1400

-14.29%

To calculate expected loss in dollars,

we calculate expected Loss on the portfolio

= Beta*Expected Drop in Index

0.60*(-14.29%)

-8.57%

The dollar value of expected Loss is therefore = 1000000*(-8.57%)

=$-85700

2. Number of contracts to sell for hedging

= (Portfolio value * Beta)/(Current S&P 500 value * contract size)

= (1,000,000 * 0.60)/(990 * 250)

=600000/247500

=2.4242

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