Question: Consider a U.S. portfolio manager who invests 5,000,000 in shares of a U.K. company. In order to hedge the stock market risk, he sells FTSE

Consider a U.S. portfolio manager who invests £5,000,000 in shares of a U.K. company. In order to hedge the stock market risk, he sells FTSE stock index futures that expire in three months. The current price of the FTSE stock index futures contract is 4,098 with a multiplier of £10. The current exchange rate is $1.58/£. One month later, the investment in the U.K. Company is worth £5,022,000. The FI'SE stock index futures price is now 4,200 and the exchange rate is $ 1.65/£.
a. Calculate the number of futures contracts that the portfolio manager must sell.
b. Calculate the profit or loss in dollar terms and pound terms.

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