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

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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
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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...
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