You own a $1 million portfolio of aerospace

You own a $1 million portfolio of aerospace

1. You own a $1 million portfolio of aerospace stocks with a beta of 1.2. You are very enthusiastic about aerospace but uncertain about the prospects for the overall stock market. Explain how you could hedge out your market exposure by selling the market short. How much would you sell? How in practice would you go about “selling the market”?

2. In March 2009, nine-month futures on the Brazilian Ibovespa stock index traded at 44,439. Spot was 41,908. The interest rate was 11.25% and the dividend yield was about 3%. Were the futures fairly priced?