What trade is necessary to achieve-reduce the beta

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Reference no: EM131956851

Question: A company has a $36 million portfolio with a beta of 1.2. The futures price for a contract on the S &P 500 index expiring next month is equal to $900. Futures contracts can be traded on 250 times the index. The risk free rate is 6% per annum and dividend yield for the index is 39%. What trade is necessary to achieve the following:

- Eliminate all systematic risk in the portfolio for the next month.

- Reduce the beta to 0.9

- Increase beta to 1.8

Assuming you follow a hedging strategy aiming to eliminate all systematic risk, what do you expect the hedge effectiveness to be if S & P 500 is equal to $1000 in a month? Assume that during that time the value of your portfolio went up by 17%.

Reference no: EM131956851

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