10 May SHOULD YOU BE LONG OR SHORT THE CONTRACTS? WHY?
2. You manage a $13.5 million portfolio currently all invested in equities and has a beta of 1.2. You believe that the market is on the verge of a big but short-lived downturn; you would move your portfolio temporarily into T-bills but you do not want to incur the transaction costs of liquidating and reestablishing your equity position. Instead you decide to temporarily hedge your equity holding with S&P 500 index futures contracts. 1) Should you be long or short the contracts? Why? 2) How many contracts should you enter into? The S&P 500 index futures price is now at 1286 and the contract multiplier is $250. 3) Suppose instead of reducing your portfolio beta all the way down to zero you decide to reduce it to 0.5 how many index futures contracts should you enter into?
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