Exhibit 21.8 Use the Information Below for the Following Problem(S)

question 58

Multiple Choice

Exhibit 21.8
Use the Information Below for the Following Problem(S)
Consider a portfolio manager with a $20,500,000 equity portfolio under management. The manager wishes to hedge against a decline in share values using stock index futures. Currently a stock index future is priced at 1250 and has a multiplier of 250. The portfolio beta is 1.25.
-Refer to Exhibit 21.8.Calculate the number of contract required to hedge the risk exposure and indicate whether the manager should be short or long.

• A) 100 contracts long.
• B) 82 contracts short.
• C) 82 contracts long.
• D) 100 contract short.
• E) None of the above.

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Definitions:

Marginal Product

The additional output that results from using one more unit of a particular input while holding other inputs constant.

Variable Resource

A factor of production whose quantity can be changed easily by a firm in the short run to adjust output levels.

Total Variable Cost

The sum of all variable expenses associated with producing a particular level of output.

Total Fixed Cost

An expenditure that does not change with the level of production or sales over a short period.