FRM Part I · FRM Exam Part I · Using Futures for Hedging
A portfolio manager holds a $20 million equity portfolio with a beta of 1.2 relative to the S&P 500. The S&P 500 futures price is 4,000 and the contract multiplier is $250. To reduce the portfolio beta to zero, how many futures contracts should the manager trade?
The manager should sell 24 contracts. Each contract is worth $1 million (4,000 x 250), and a beta of 1.2 on a $20 million portfolio requires 1.2 x 20 = 24 contracts short to bring beta to zero.
- ASell 24 contractsCorrect
- BSell 20 contracts
- CBuy 24 contracts
- DSell 30 contracts
Explanation
Contract value = 4,000 x 250 = $1,000,000. Contracts = beta x portfolio value / contract value = 1.2 x 20,000,000 / 1,000,000 = 24. A short position is needed to cut beta to zero. Selling 20 ignores the beta; buying would increase exposure.
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
- 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…
- A portfolio manager hedges a position in an asset using futures with a minimum-variance hedge ratio of 0.80 and a futures contract size of 1…