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Homework answers / question archive / A speculator is convinced that the stock market will fall significantly in the forthcoming months
A speculator is convinced that the stock market will fall significantly in the forthcoming months. The current market index (30 March) level is 7200 (FTSE 100). He is investigating a strategy to exploit this market fall by selling five FTSE 100 Index futures on ICE with a September 2019 expiry, current price 7150. Contract Unit for this futures is £10 per one FTSE 100 Index point. Assume: no transaction costs. Required: For the derivative (a) What would the profit (loss) be if the index rose to 7400 in September under the strategy? (b) What would the profit (loss) be if the index fell to 6800 in September under the strategy?
Short Position of worth = 10*5*7200 = 360,000
(a) Profit/loss if the index rose to 7400. = (7200-7400)*10*5 = -10,000
(b) Profit/ loss if the index fell to 6800 = (7200-6800)*10*5 = 20,000
