You are long a portfolio with value 1,000 and a beta of 0.7. You want to hedge a

Question

You are long a portfolio with value 1,000 and a beta of 0.7. You want to hedge against price fluctuations using futures written on the index. The index value is equal to S0 = 1 and the dividend yield on the index is 4% per annum. The risk-free rate is 3% per annum. The futures price with maturity 4 months is F0 = 1.02 and a futures contract is written on 200 times the index. At the end of 2 months, the 2-month futures price is 1.12 and the spot index is at 1.11. Compute the total value of your position (in $

Explanation / Answer

the cash flows from position

F* = S (1 + r - y)t

S is the spot price of the index, F is the futures prices, y is the annualized dividend yield on the stock and r is the riskless rate

=1.11*1000(1+3-4)2

=1110(0)

=0

Hence being long will not give any profits

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