On the 1st October 2007, a London based pension fund manager managed a fund that worth 100 million with a beta of 0.90. The manage is concerned about the performance of the market as she need to liquidate the fund to cover the withdrawals on 29th February 2008. Therefore, she plan to hedge the portfolio using the March 2008 contract on the FTSE 100 futures. She observe the March 08 FTSE futures contract trading at 6660.45 (on 1st October 2007). When she closes her contract out on 29th February, the FTSE future contract is trading at 6000.00 and the value of the portfolio has dropped to 85 million. Contract Valued at 10 per index point

a) How many contract should the manager take to hedge the exposure to the market for the period until the liquidation of the portfolio on 29th February 2008. Short or long and when is the position closed out?

b) What is the net profit/loss (in pound), how much did the manager gains/loses in each of the equity market and the futures market?

c) Why the hedge may not be perfect?

d) Calculate the effect of the manager strategy on the fund return in %, the fund return with and without the hedging

Could you please show working out as well