A pension fund currently has $50 million in the S&P 500 index and $50million in Treasury bills (risk-free asset). The current 6-month S&P 500futures price is 1390.5, and one contract is on $250 times the index.a) Suppose that the manager is concerned about the performance ofthe index over the next 6 months. Explain what position in the S&P500 futures he should take to eliminate all exposure to the marketover the next six months.b) If the manager decides to switch to a portfolio that invests 30% inthe index and 70% in T-bills for a period of 6 months, explain howhe could achieve that using S&P 500 futures.

Solution: (a). In order to eliminate market risk from the portfolio and hedge it completely, the…

A pension fund currently has $50 million in the S&P 500 index and $50 million in Treasury bills (risk-free asset). The current 6-month S&P 500 futures price is 1390.5, and one contract is on $250 times the index.

A pension fund currently has $50 million in the S&P 500 index and $50 million in Treasury bills (risk-free asset). The current 6-month S&P 500 futures price is 1390.5, and one contract is on $250 times the index.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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