## FMP QUIZ 1

Good Student
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Joined: Thu Oct 04, 2012 2:09 am

### FMP QUIZ 1

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.

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
Finance Junkie
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Joined: Thu Jul 19, 2012 6:49 pm

### Re: FMP QUIZ 1

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

Good Student
Posts: 29
Joined: Thu Oct 04, 2012 2:09 am

### Re: FMP QUIZ 1

shreyas
Finance Junkie
Posts: 83
Joined: Thu Jul 19, 2012 6:49 pm

### Re: FMP QUIZ 1

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