A. A company has a $20 million portfolio with a beta of 1.2. It would like to use futures

contracts on the S&P 500 to hedge its risk. The index futures currently stand at 1080, and each

contract is for delivery of $250 times the index. What is the hedge that minimises the risk?

What should the company do if it wants to reduce the portfolio's beta to 0.6?

B. An airline executive has argued: "There is no point in our using oil futures. There is just as

much chance that the price of oil in the future will be less than the futures price as there is

that it will be greater than this price". Discuss the executive's viewpoint.

b. Does a perfect hedge always lead to a better outcome than an imperfect hedge? Explain

your answer.