Hedging a single stock with index futures
Asked at Two Sigma
You are long a large position in a single stock and want to strip out its exposure to the overall market, keeping only your view on the company itself. You short index futures against it.
Does this remove the position's risk? If not, what remains, and how many futures do you short per dollar of stock?
Show a hint
Write the stock's return as a market piece plus a leftover. The index hedge only cancels one of them.
Your answer
This one is open-ended. Work it through, then check your reasoning against the full solution.