Calculate the number of S&P futures contracts to sell to hedge the market exposure of an equity portfolio value at $1m and with a of 1.5. The S&P is currently at 1000 and the contract multiplier is 250.

Calculate the number of S&P futures contracts to sell to hedge the market exposure of an equity portfolio value at $1m and with a of 1.5. The S&P is currently at 1000 and the contract multiplier is 250.
A . 4
B . 8
C . 6
D . 2

View Answer

Answer: C

Explanation:

Since the equity portfolio has a beta of 1.5, we need to sell short enough number of futures contracts as to have $1 x 1.5 = $1.5m short in notional. The value of one S&P futures contract is 1000 x 250 = $250,000, and therefore in order to be short $1.5m, we need to sell 6 contracts.