FMP QUIZ 1

madhuri1682
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FMP QUIZ 1

Postby madhuri1682 » Sat Oct 06, 2012 1:40 pm

Please explain the calculation
A fund manager owns a $50 million USD growth portfolio that has a beta of 1.6 relative to the S&P 500. The S&P 500 Index is trading at 1,190. Calculate the number of futures contracts the fund manager needs to sell to hedge the portfolio. The multiplier of the S&P 500 is 250. Suppose that at the maturity of futures contracts the fund manager experiences a decline in value of his portfolio of 15%. The market index is trading at 1078, and the risk free rate is 3%. Calculate the effectiveness of the hedge.

Choose one answer.
a. No gain, small loss
b. Gain of 32K
c. Gain of 424K
d. Gain of 1500K
The correct answer is: Gain of 32K.


Effectiveness = loss on portfolio + gain on hedge = -7.5 million + 7.532 million = 32K.

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shreyas
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Re: FMP QUIZ 1

Postby shreyas » Sat Oct 13, 2012 11:33 am

The answer is correct, can you tell me your exact concern. Thanks

madhuri1682
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Joined: Thu Oct 04, 2012 2:09 am

Re: FMP QUIZ 1

Postby madhuri1682 » Mon Oct 15, 2012 4:53 pm

please explain the calculation

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shreyas
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Re: FMP QUIZ 1

Postby shreyas » Tue Oct 16, 2012 8:18 pm

The fund manager wants to hedge the portfolio completely. In this case we using hedge formula we get =1.6*50mn/1190*250= 269 contracts.

On expiry it is given that that the portfolio has lost a value of 15%*50mn= $7.5mn.

On the future contract we gain (1190-1078)*250*269= $7.532mn

So the net gain to the manager= 7.532-7.5= 32k


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