3. On December 1, an investor holds 50,000 shares of a certain stock. The market price is $30 pershare. The investor is interested in hedging against movements in the market over the nextmonth an decides to use an index futures contract. The index futures price is currently 1,500and one contract is for delivery of $50 times the index. The beta of the stock is 1.3. Whatstrategy should the investor follow? Under what circumstances will it be profitable?

Calculate the value of the investor's portfolio: Portfolio value = Number of shares * Market price…

Answered: ging against movements in es contract.…

Business

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ging against movements in es contract. The index fut

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Question

3. On December 1, an investor holds 50,000 shares of a certain stock. The market price is $30 per
share. The investor is interested in hedging against movements in the market over the next
month an decides to use an index futures contract. The index futures price is currently 1,500
and one contract is for delivery of $50 times the index. The beta of the stock is 1.3. What
strategy should the investor follow? Under what circumstances will it be profitable?

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On July 1, an investor holds 50,000 shares of a certain stock. The market price is $30 per share. The investor is interested in hedging against movements in the market over the next month and decides to use the September Mini S&P 500 futures contract. The index is currently 1,500 and one contract is for delivery of $50 times the index. The beta of the stock is 1.3. What strategy should the investor follow? Under what circumstances will it be profitable?
i.On April 1, an investor holds 40,000 shares of a certain stock. The market price is $28 per share. The investor is interested in completely hedging against movements in the market over the next month and decides to use the June Mini S&P 500 futures contract. The index is currently 4,500 and one contract is for delivery of $50 times the index. If the beta of the stock is 1.2, what strategy should the investor follow to completely hedge their stock portfolio? ii. After a month, the investor wishes to partially unwind their hedge to reach an overall target beta of 1. Using your answer from above, what strategy should the investor follow to reach their target? They still hold 40,000 shares and the market price is now $27.5 per share. The June Mini S&P Futures index is still at 4,500 and one contract for delivery is of $50 times the index. What will be the residual remaining position in their futures contracts?
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