FRM Part I · FRM Exam Part I · Futures Markets
A fund holds 20 million of equity exposure with a beta of 1.2 relative to the index. The index futures price is 4,000 and the multiplier is 250 per index point. To reduce beta to 0.6 using futures, what position is required?
Short 12 contracts. Each contract is worth 1 million, and reducing beta by 0.6 on a 20 million portfolio requires hedging 12 million of exposure, which is 12 contracts sold short. Selling 24 would take beta to zero.
- AShort 24 contracts
- BShort 12 contractsCorrect
- CLong 12 contracts
- DShort 20 contracts
Explanation
Contract value = 4,000 x 250 = 1,000,000. Contracts = (0.6 - 1.2) x 20,000,000 / 1,000,000 = -12, so short 12. Short 24 would eliminate beta entirely to zero; long 12 has the wrong sign.
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