The December 2022 FTSE 100 stock index futures contract is reading 6450 while the cash index is reading 6400. The futures contract is worth £10 per point.

i. Is the dividend yield higher or lower than the risk-free rate of interest?

ii. You have £30 million of funds invested in FTSE 100 stocks under management and are concerned about a fall in the market by December 2022 expiration to 5500. Describe the hedging strategy that you may adopt to protect your fund against such a fall.

iii. You are optimistic about the market prospects and predict that the FTSE 100 index will be reading 7500 by expiration. Describe a speculative strategy using the futures contract that you would adopt and the risks that you run.

Answer rating: 100% (QA)

Answer i II iii The dividend yield is LOWER than the risk free rate since the futur... View the full answer