6. It is mid-June, 2023, and you are managing a GBP 100 million portfolio of U.K. stocks that is benchmarked to the FTSE 100 Index. You expect to receive additional inflows of GBP 30 million in September, 2023, but you would like to lock in the level of the market today using futures contracts on this Index. You collect the following information:

FTSE Index (latest quote): 7,631.74 Projected Dividend Yield: 3.82% p.a.

FTSE Contract Value: GBP 10 per Index point

Minimum Price Interval (tick): GBP .50

Government Yields 3 Months 6 Months 12 Months

United Kingdom 4.11% 4.43% 3.92%

United States 4.85% 4.94% 4.64%

a) In order to achieve your desired hedge, would you buy or sell futures contracts on the FTSE 100? Briefly explain your answer.

b) Using this information, calculate the fair value of the September 2023 FTSE100 futures contract. List the "fair value" futures price that is closet to that number.

c) How many contracts would you buy or sell?

 

d) Now assume your portfolio's returns are ultimately measured in U.S. dollars and you routinely hedge it from pounds back into dollars using three-month futures contracts on the pound as measured in dollars. Without doing any calculations, would you expect the futures price of the pound to be at a forward premium or discount to today's USD/GBP spot price? Briefly explain your answer.

 

Answer rating: 100% (QA)

a To achieve the desired hedge you would sell futures contracts on the FTSE 100 Selling futures contracts allows you to lock in the current level of t... View the full answer