You manage a portfolio worth $13.8 million, currently all invested in equities, and believe that the market is on the verge of a big but short-lived downturn. You would move your portfolio temporarily into T-bills, but you do not want to incur the transaction costs of liquidating and reestablishing your equity position. Instead, you decide to temporarily hedge your equity holdings with E-mini S&P 500 index futures contracts.
1) Should you be long or short the contracts? Why?
2) How many contracts should you enter into? The S&P 500 index futures price is now at 1286 and the contract multiplier is $250.
3) Suppose instead of reducing your portfolio beta all the way down to zero, you decide to reduce it to 0.5, how many index futures contracts should you enter into?
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