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Suppose that the ISE100 index has a level of 80,000. The continuously compounded rate of return on a 1-year Treasury bill is 7%. You wish to hedge an...
Suppose that the ISE100 index has a level of 80,000. The continuously compounded rate of returnon a 1–year Treasury bill is 7%. You wish to hedge an 800,000TL portfolio that has a beta of 1.1and a correlation of 0.95 with the XU100. One index futures contract is on 100TL times the indexand the index has no expected dividend yield.a. What should be the 1–year futures price for the XU100 index?b. How many index contracts should you short to hedge your portfolio?c. What is the expected value and variance of the rate of return on the hedged Portfolio?
