You manage a $13.5 million portfolio, currently all invested in equities, and has a beta of 1.2. you 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 holding with 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?

Variable rate cd’s = $90 treasury bills = $150 discount loans = $20 treasury notes = $100 fixed rate cds = $160 money market deposit accts. = $140 savings deposits = $90 fed funds borrowing = $40 variable rate mortgage loans $140 demand deposits = $40 primary reserves = $50 fixed rate loans = $210 fed funds lending = $50 equity capital = $120 a. develop a balance sheet from the above data. be sure to divide your balance sheet into rate-sensitive assets and liabilities as we did in class and in the examples. b. perform a standard gap analysis and a duration analysis using the above data if you have a 1.15% decrease in interest rates and an average duration of assets of 5.4 years and an average duration of liabilities of 3.8 years. c. indicate if this bank will remain solvent after the valuation changes. if so, indicate the new level of equity capital after the valuation changes. if not, indicate the amount of the shortage in equity capital.