A British investor holds a portfolio of British stocks. The market value of the portfolio is £20million, with a ? of 1.5 relative to the FTSE index. In November, the spot value of the FTSE index is 4,000. The dividend yield and pound interest rates are all equal to 4% (flat yield curve).
a. The investor fears a drop in the British stock market. The size of FTSE stock index contracts is ten pounds times the FTSE index. There are futures contracts quoted with December delivery. Calculate the futures price of the index.
b. How many contracts should you buy or sell to hedge the British stock market risk?