You have a well-diversified portfolio currently worth $100M. The FTSE100 index is currently priced at 6700. Your portfolio has 50% higher uncertainty against FTSE100 index futures and has a 0.72 correlation with the FTSE100 index futures. The current annual risk-free rate is 0.0375. You think that the market would fall in the next three months due to failure to reach to some decent negotiations in the European Union and bounce back in 3-6 months.

Explain how you would hedge this portfolio, assuming that you wish to be fully hedged. Suppose that current FTSE100 index futures price is 6740 and the contract has a multiplier of $25.

Answer rating: 100% (QA)

To fully hedge your portfolio against the FTSE100 index you can use a futures contract to lock in th... View the full answer