3.

(a) As a portfolio manager you are concerned that the FfSE 100 index has peaked after a recent display of strength and you want to hedge you portfolio's value which is £20,000,000. The FfSE 100 index is currently standing at 6480 and the beta of your portfolio is 1.

Given the market quotes at the end of this question discuss different ways in which the portfolio can be hedged. Using numerical examples demonstrate the outcome of a hedge when:

(i) the index falls by 200 points;

(ii) the index rises a further 200 (from 6000);