Please answer the following questions, feel free to use excel, and/or word for your answers. I will need the solutions within 24 hours. I’ve attached an example solution for adjusting the beta as well as an attachment of some notes for derivative swaps if needed.
Please note: Many of these problems have multiple parts (i.e. a. b. c. d., …)
1) You have a $60 million equity portfolio with a Beta of 1.5, and appropriate equity futures are trading at 2300 (Full Price) and have a Beta of .99. (10 Points)
What futures trade would be required to reduce the overall beta of your portfolio to .8?
2) Tyler is a portfolio manager for an unconstrained bond fund and has a portfolio that totals $475 million. Tyler’s overall bond allocation is 60% and the Fixed Income portfolio has an overall duration of 8. Tyler is worried about interest rates increasing over the next few months and wants to lower the duration of his fixed income holdings. Since Tyler’s Fund is unconstrained, it is hard to find an appropriate derivative contract that matches his portfolio, therefore, his hedged portfolio is subject to increased basis risk.
Tyler found a derivative Fixed Income futures contract that trades for $215,000 (full price, including multiplier) that has an overall effective duration of 2. Also, Tyler has adjusted for the mismatch of his portfolio with the duration and has a calculated a yield beta of 1.5 for the derivative contract with the holdings in his portfolio.
What futures trade would be required to reduce the portfolio’s fixed-income holdings to have an effective duration of 3? (10 Points)