Adam, a speculator, is convinced that the stock market will fall significantly in the forthcoming months. The current market index (14 August) level is 4954 (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.

photo in files

Assume: no transaction costs.

Required: For the derivative

(a) What would the profit (loss) be if the index rose to 5450 in December under the strategy?

(b) What would the profit (loss) be if the index fell to 4550 in December under the strategy?