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Hedging using futures
1. You are managing a portfolio of stocks which currently has a beta of 1.4 and a value of $1 million. The current level of the S&P 500 is 1200. You fear that the market is going to do poorly, and would like to reduce your beta to 0.6. If each contract's payoff is $250 times the of the S&P500 index, what position should you take in the S&P500 index futures?
2. You are an ostrich farmer and would like to hedge the risk you face due to ostrich meat price fluctuations. Unfortunately, there are no ostrich futures contracts. You have noted that the correlation between the price of ostrich meat and changes in beef futures prices is 0.7. However ostrich meat is much more volatility, with a standard deviation of daily changes of $0.3 per pound, versus beef futures, at only $0.1 per pound. You would like to hedge the risk from selling 100 000 pounds of ostrich meat. Each beef contract covers 50 000 pounds of beef. What position should you take in the beef futures market?
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