2012 Q4a – Hedge Ratios (Immunization)

Suppose you own a portfolio that is currently valued at $10m. A futures contract is
available for trade, and you estimate that cov(P, F) / var(F) = 0.5,
where cov(P, F) is the covariance between the changes in the value of your
portfolio P with the changes in the value of the futures contract F, and var(F) is
the variance of the changes in the value of the futures contract.

Explain how you would trade the futures contract in order to minimise the risk of your
portfolio. Ignoring margin requirements, how much capital will you commit to the
hedge?