This project is by Denver H. Travis, Chase/Francis C. Doyle Distinguished Professor at Loyola University – New Orleans
NOTE: You must complete the first part of this assignment at least 2 days before the last part of the assignment.
First Part (at least 2 days before the last part):
For this assignment, you are to hedge the market risk of a one-stock portfolio. The stock will be of your choosing. You will use E-mini S&P 500 Futures to cross-hedge. The contract size for mini S&P 500 futures is $50 times the futures price. This hedge is only necessary for a few weeks, so select the December 20xx contract.
Buy either 100 or 1,000 or 10,000 shares of your selected stock. Find the stock Beta. (Total investment times Beta needs to be between $50,000 and $100,000). Then calculate the number of futures contracts that you will need to hedge the market risk of your portfolio. You’ll have to round off to a whole number. Rounding down leaves you with a net long position; rounding up puts you in a net short position.
Number of futures contracts = , where VF = futures price X contract size.
Since you have the stock, you are concerned about falling prices, thus we will enter into a contract that pays when market prices fall. A short position in futures will provide this.
Last Part (at least 2 days after the first part):
Calculate or observe the gains and losses from your stock and futures position. How well did the hedge do? (i.e.: Did the gains and losses cancel each other out? If not, show by how much?)
What to turn in:
a. Show number of futures contracts calculation
2. Printed “Transaction History”:
a. Circle the stock purchase.
b. Circle the short futures position.
3. Hedge analysis from the Last Part