FRM Part I · FRM Exam Part I · Using Futures for Hedging
A portfolio manager holds an equity portfolio worth $20 million with a beta of 1.2 relative to the S&P 500. The index futures price is 4,000 and the contract multiplier is $250 per index point. To reduce the portfolio beta to zero, how many futures contracts should be traded?
The manager should sell 24 contracts. Each contract covers $1 million of the index, and the portfolio's beta-adjusted exposure is 1.2 times $20 million, or $24 million. Selling 24 contracts offsets this and brings beta to zero.
- ASell 24 contractsCorrect
- BSell 20 contracts
- CBuy 24 contracts
- DSell 17 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, sold to hedge. Selling 20 ignores beta; buying would increase exposure.
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