A company has $20 million portfolio with beta of 0.8. It would like to use futures contracts on the S&P 500 to hedge its risk. The index is currently standing at 1050, and each contract is for delivery of $250 per index points. What is the hedge that minimises its risk? What should the company do if it wants to reduce the beta of the portfolio to 0.2? a. Buying 76 futures contracts minimises the risk. To reduce the beta to 0.2, the company should instead buy 61 contracts. b. Buying 61 futures contracts minimises the risk. To reduce the beta to 0.2, the company should instead buy 46 contracts. c. Selling 76 futures contracts minimises the risk. To reduce the beta to 0.2, the company should instead sell 61 contracts. d. Selling 61 futures contracts minimises the risk. To reduce the beta to 0.2, the company should instead sell 46 contracts.

A company has $20 million portfolio with beta of 0.8. It would like to use futures contracts on the S&P 500 to hedge its risk. The index is currently standing at 1050, and each contract is for delivery of $250 per index points. What is the hedge that minimises its risk? What should the company do if it wants to reduce the beta of the portfolio to 0.2? a. Buying 76 futures contracts minimises the risk. To reduce the beta to 0.2, the company should instead buy 61 contracts. b. Buying 61 futures contracts minimises the risk. To reduce the beta to 0.2, the company should instead buy 46 contracts. c. Selling 76 futures contracts minimises the risk. To reduce the beta to 0.2, the company should instead sell 61 contracts. d. Selling 61 futures contracts minimises the risk. To reduce the beta to 0.2, the company should instead sell 46 contracts.

International Financial Management

14th Edition

ISBN:9780357130698

Author:Madura

Publisher:Madura

Chapter11: Managing Transaction Exposure

Section: Chapter Questions

Problem 35QA

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