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A fund manager has a portfolio worth $100 million with a beta of 1.5. The manager is concerned about the performance of the market over the next two months and plans to use three-month futures contracts on the S&P 500 to hedge the risk. The current level of the index is 2250, one contract is on 250 times the index, the risk free rate is 2%, and the dividend yield on the index is 1.7% per year. (Assume all the rates are continuously compounded.)
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The following diagram depicts Juliaâs choice of consumption in periods 1 and 2. She has no income in period 1 and an income of $115 in period 2. The current interest rate...
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May 27 2020