FRM Part II · FRM Exam Part II · VaR Mapping
A manager holds a USD 100 million equity portfolio with a beta of 1.25 to an index. She wants to reduce the portfolio's beta to 0.75 using index futures, with each contract having a notional of USD 250,000 and a beta of 1 to the index. What position should she take?
She should sell 200 index futures contracts. Lowering beta by 0.50 on a USD 100 million portfolio requires a short notional of USD 50 million, and dividing by the USD 250,000 contract size gives 200 contracts. Buying would increase market exposure instead.
- ASell 200 contractsCorrect
- BBuy 200 contracts
- CSell 500 contracts
- DSell 250 contracts
Explanation
The beta change needed is 0.75 - 1.25 = -0.50. The required futures notional = 0.50 x 100m = USD 50m short. Contracts = 50,000,000 / 250,000 = 200 sold. Buying would raise beta, and 500 comes from using the wrong base.
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