Adam, a speculator, is convinced that the stock market will fall significantly in the forthcoming months. The current market index (14 August) level is 4997 (FTSE 100). He is investigating a strategy to exploit this market fall:
Sell five FTSE 100 Index futures on NYSE Liffe with a December expiry, current price 5086.
Extracts from the Financial Times
FTSE 100 Index Futures (LIFFE) £10 per full index point
Assume: No transaction costs.
i. What would the profit (loss) be if the index rose to 5500 in December under the strategy?
ii. What would the profit (loss) be if the index fell to 4500 in December under the strategy?