Quiz IV Practice - worth $250*S&P500 The S&P 500 is...

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
Quiz IV Practice Problems Econ 435 Fall 2002 1) The S&P 500 futures contract is worth $250*S&P 500. The S&P 500 is currently worth 1100. The S&P 500 will pay a dividend of 4% over the next year. If the risk- free rate is 5%, what is the fair value of the S&P 500 futures contract that expires in one year? Recall the fair value equation F=P*(1+r-y). F = 1100*(1+.05-.04) = 1111 2) You own a well-diversified portfolio worth $10,000,000. The beta (with respect to the S&P 500) of your portfolio is 1.2. There exists S&P 500 futures contracts
Background image of page 1
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: worth $250*S&P500. The S&P 500 is currently worth 1400. How would you use these futures contracts to decrease the beta of your portfolio to 0? A 1% increase in the S&P increases the value of the portfolio by 1.2% (beta =1.2) or 120,000. To set beta = 0 we need to sell futures. To find how many futures to sell, note that a 1% increase in the S&P causes a futures contract to gain (1400*.01)*250 = 3500. To set beta equal to zero sell 120000/3500 = 34.29 futures contracts...
View Full Document

{[ snackBarMessage ]}

Ask a homework question - tutors are online