A company has a $36 million portfolio with a beta of 1.2. The futures price for a contract on an index is 900. Futures contracts on $250 times the index can be traded. What trade is necessary to reduce beta to 0.8?

A company has a $36 million portfolio with a beta of 1.2. The futures price for a contract on an index is 900. Futures contracts on $250 times the index can be traded. What trade is necessary to reduce beta to 0.8?

 

Solution :-

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Reduction in beta = 1.2 – 0.8 = 0.40

Contracts should be shorted =

= ( 0.40 * $36,000,000 ) / ( 900 * $250 )

= 64 Contracts.