You Hold a Portfolio Made of French Stocks and Worth $\beta$

question 41

Essay

You hold a portfolio made of French stocks and worth €10 million. The beta ( $\beta$ ) of this portfolio relative to the CAC index is 1.5. The interest rate for the euro is 4% for all maturities and the annual dividend yield is 2%. The spot value of the CAC index on January 1, 2000, is 5,000. A CAC contract has a size of €10 for each index point.
a. What should be the future price of the CAC contract with a three-month maturity?
b. You fear a fall in the French stock market. What should be your hedge ratio? How many contracts do you buy/sell?

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