2. Analysts have advised the manager of an FfSE 100 index-tracking fund that the associated index is about to fall heavily. It is believed that as much as 8% of its current level could be lost before the nearby futures contract reaches maturity, and the fall may not end there. H the portfolio has a current value of £2,000,000, a beta of 0.95, the FfSE 100 index is at 6000, the current risk-free rate of interest is 6.0% p.a., and dividend yield stands at 2.5% p.a.:

(a) Explain how the nearby 'fair' futures price can be calculated from the data above.

(b) Demonstrate how the portfolio can be hedged using futures contracts until the maturity date of the nearby contract.

(c) H a hedge horizon is set 30 days after the maturity of the nearby futures contract demonstrate how:

(i) a 'strip' hedge might function as a hedge vehicle;

(ii) a 'stack' hedge might function as a hedge vehicle.

(d) With the aid of examples explain how synthetic futures positions may be created using call and put options.