FRM Part I · FRM Exam Part I · Using Futures for Hedging
A fund holds a $40 million equity portfolio with a beta of 0.90. The index futures price is 4,000 and the multiplier is $50. The manager wants to raise the portfolio beta to 1.35 using futures. Which action is correct?
Buy 90 contracts. Each contract has a notional value of $200,000, and raising beta from 0.90 to 1.35 on a $40 million portfolio requires added exposure of 0.45 x $40 million = $18 million, which is 90 long futures contracts.
- ABuy 90 contractsCorrect
- BBuy 60 contracts
- CSell 90 contracts
- DBuy 135 contracts
Explanation
Contract value = 4,000 x 50 = $200,000. Number = (1.35 - 0.90) x 40,000,000 / 200,000 = 0.45 x 200 = 90, bought because beta is being increased. Sell 90 has the wrong direction. Buy 135 uses the target beta only, and buy 60 is a mistaken base.
Did you get it right without looking?
One question tells you little. A timed set on Using Futures for Hedging shows your real accuracy, how long you take and where you lose marks.
More Using Futures for Hedging questions
- Which statement best explains why tailing the hedge reduces the number of futures contracts when the futures price exceeds the spot price?
- A company will sell an asset and is short futures to hedge. Which change in the basis (defined as spot minus futures) benefits the hedger, a…
- A company holds 2,000,000 barrels of exposure to be hedged with a futures contract of 1,000 barrels. The hedge ratio is 0.75. Spot changes h…
- A firm hedges with futures and the minimum-variance hedge ratio is 0.80 with correlation 0.80 between spot and futures price changes. What p…
- A farmer shorts futures at 250 to hedge a crop to be sold in two months. When the hedge is closed, the spot price is 238 and the futures pri…
- A hedger estimates that the standard deviation of the change in spot price is 0.06 and the standard deviation of the change in futures price…