Question 10

The December 2021 FTSE 100 stock index futures contract is reading 6650 while the cash index is reading 6500. The futures contract is worth 20 per point.

i. Is the dividend yield higher or lower than the risk-free rate of interest?

ii. You have 40 million of funds invested in FTSE 100 stocks under management and are concerned about a fall in the market by December expiration to 5500. Describe the hedging strategy that you may adopt to protect your fund against such a fall.

iii. You are optimistic about the market prospects and predict that the FTSE 100 index will be reading 7200 by expiration. Describe a speculative strategy using the futures contract that you would adopt and the risks that you run.