Question 7 The March FTSE 100 stock index futures contract is reading 5300 while the cash index is reading 5250. The futures contract is worth 10 per point. (i) Explain why the FTSE futures contract is at a forward premium. [2 marks] (ii) You have 10 million of funds invested in FTSE 100 stocks under management and are concerned about a fall in the market by March expiration to 3800. Describe the hedging strategy that you may adopt to protect your fund against such a fall. [4 marks] (iii) You are pessimistic about the market prospects and predict that the FTSE 100 index will be reading 4800 by expiration. Describe the speculative strategy that you would adopt and the risks that you run. [4 marks]