A speculator is convinced that the stock market will fall significantly in the forthcoming months

Finance Dec 21, 2020

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?

Expert Solution

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

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