R 27 Futures example 3

[sachin_patel]

Equity Analysts Inc. (EQA) is an equity portfolio management firm. One of its clients has decided to be more aggressive for a short period of time. It would like EQA to move the beta on its $65 million portfolio from 0.85 to 1.05. EQA can use a futures contract priced at $188,500, which has a beta of 0.92, to implement this change in risk.
A. Number of contract ? Answer = 75 contracts.
B. At the horizon date, the equity market is down 2 percent. The stock portfolio falls 1.65 percent, and the futures price falls to $185,000. Determine the overall value of the position and the effective beta.
I am just concerned about valuation calculation I did vs they did.
my answer was:
their original value of portfolio was 65,000,000 + 75*188500 = 79,137,500
New value is 65,000,000(1-0.0165) + 75* 185000 = 77,802,500
their answer was
The value of the stock portfolio will be $65,000,000(1 – 0.0165) = $63,927,500. The profit on the futures transaction is 75($185,000 – $188,500) = –$262,500. The overall value of the position is $63,927,500 – $262,500 = $63,665,000.
So they didn’t include future’s value in calculating original amount.. Am I missing something?
Thanks

 

[Galli]

They’re asking for the value of the portfolio @ ‘horizon’ date which I think implies the futures contract has expired. Therefore the notional value of the future’s contract doesn’t apply, just the P&L from the trade does.

 

[sachin_patel]

got it.. thanks.. that’s what they do for remaining examples as well.. now it makes sense..

 

[sachin_patel]

Example 7 clears it..
Because at initiation of futures, there is no cash flow and portfolio value does not change.