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Expected Market Decline: Loss and Profit

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Please help with the following problem.

Assume that you manage an equity portfolio worth $20,000,000. The portfolio has a beta of 1.1. The current value of the S&P 500 stock index is 1200 and the value of an S&P 500 stock index futures contract is 250 times the index value.

a. How many futures contracts would you buy or sell to completely hedge the portfolio against an expected market decline?
b. Assume that the S&P 500 stock index declines 5% over the next few months. Calculate the profit or loss on your futures position.
c. Assume that the S&P 500 stock index declines 5% over the next few months. Calculate the profit or loss on your unhedged equity portfolio.

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Solution Summary

Expected market decline and loss of profit are discussed in this solution. The answer to the problem is provided in an Excel spreadsheet.

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Equity portfolio $20,000,000
Beta 1.1
Stock index spot 1200
Multiplier 250

Question a
Equity portfolio $20,000,000
Divided by: Stock index spot 1200
Divided by: ...

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