FBE459_Homework2

FBE459_Homework2 - UNIVERSITY OF SOUTHERN CALIFORNIA...

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UNIVERSITY OF SOUTHERN CALIFORNIA MARSHALL SCHOOL OF BUSINESS FBE 459 Financial Derivatives (P. Matos – Spring 2011) Homework 2 (date due: start of class on Wednesday, February 23) 1. Consider an investor who in June holds 20,000 IBM shares, each worth $100. The investor decides to use the August futures contract on the S&P500 to hedge (imperfectly) her exposure during the next month period. The current level of the index is 900 and the futures price is 908. To figure out her hedging strategy, she has collected a series of monthly returns on IBM and S&P500 index futures for the last 5 years and runs a regression. The Excel results are: SUMMARY OUTPUT: Dependent Variable: CHANGES IN IBM PRICE Regression Statistics: R Square = 0.88 Observations = 60 Coefficients Standard Error Intercept -0.001 0.0023 S&P INDX FUT CHANGES 1.10 0.106 1.a. What is the optimal hedge ratio? Can the investor hedge the market risk and still profit if IBM outperforms the market? 1.b. If each S&P500 futures is for the delivery of $250 times the index level, how many futures contracts
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FBE459_Homework2 - UNIVERSITY OF SOUTHERN CALIFORNIA...

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