Adam, a speculator, is convinced that the stock market will fall significantly i

Question

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 Life with a December expiry, current price 5086.

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?

Explanation / Answer

Statement showing Profit/loss

Particulars If index roses to 5450 If index fell to 4550 on 14 th august Sell FTSE 100 index futures 5086 5086 Buy At expiry 5450 4550 Profit/loss -364 536 No of contract 5 5 Total profit/loss -1820 2680

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