FRM Part I · FRM Exam Part I · How Do Firms Manage Financial Risk?
A firm holds a portfolio worth USD 50 million with beta 1.2 and wants to cut beta to 0.6 using stock index futures. The index futures price is 4,000 and the multiplier is USD 250 per index point. How many contracts should be sold?
Sell 30 futures contracts. Each contract covers USD 1 million (4,000 x 250). Reducing beta by 0.6 on a USD 50 million portfolio requires an offsetting exposure of USD 30 million, which is 30 contracts. Selling 60 would reduce beta to zero.
- A30Correct
- B60
- C25
- D50
Explanation
Contract value = 4,000 x 250 = USD 1,000,000. Contracts = (beta target - beta current) x P / contract value = (0.6 - 1.2) x 50m / 1m = -30, so sell 30. Selling 60 would take beta to zero; 50 ignores beta; 25 uses 0.5 change wrongly.
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