Mrs Bounty manages a diversified UK equity portfolio which has a current market value of £2 million and a beta value of 0.9. The current level of the FTSE-100 index is 7200 but she thinks that it may fall over the coming months.
The FTSE-100 index future which expires in March 2022 is currently trading at 7150 and the current premium of the FTSE-100 index at-the-money put options (European style) which expire on the same day as the future is 200 index points.
The tick value of the future and the options is £10 per index point.
Calculate the number of derivatives contracts that Mrs Bounty needs to hedge the exposure of the portfolio that she manages, stating clearly whether she should be going long or short.
Calculate the net gain or loss if the portfolio had been hedged using futures and the index is 6500 at expiry. Recalculate the net gain or loss if the index is 7500 at expiry and comment upon your results.
Calculate the ...