2. “Minimizing Cash Drag with S&P 500 Index Tools,” Joanne M. Hill and Rebecca Cheong,
Equity Derivatives Research (Goldman, Sachs, June 11, 1996, revised)
Purpose:
To test the candidate’s knowledge of futures and alternative instruments by altering a portfolio’s
expected return.
LOS: The candidate should be able to
“Stock Index Futures: Refinements” (Session 17)
• compute the correct number of index futures contracts required to partially or completely hedge
an equity portfolio;
• construct a strategy to decrease/increase the beta of a portfolio, including calculating the number
of futures contracts;
• create a synthetic T-bill or synthetic equity position using the appropriate futures contracts.
“Minimizing Cash Drag with S&P 500 Index Tools” (Session 17)
• compare and contrast the two primary tools used in cash management of equity index portfolios;
• design and evaluate a cash management strategy using futures;
• calculate and appraise returns from a cash management strategy using index futures or S&P 500
Depository Receipts (SPDRs) with returns from leaving a portion of the portfolio in cash;
• compare and contrast the cost of excess cash versus an appropriate cash management strategy
using futures or SPDRs;
• illustrate similar cash management strategies using alternative index instruments.
Guideline Answer
A. The number of futures contracts required is:
N = (value of the portfolio/value of the index futures) × beta of the portfolio
= [$15,000,000 / (1,000 × 250)] × 0.88
= [$15,000,000 / 250,000] × 0.88
= 60 × 0.88
= 52.8 contracts
Selling (going short) 52 or 53 contracts will hedge $15,000,000 of equity exposure.
B. Alternative methods that replicate the futures strategy in Part A include:
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