Hedging Strategies using Index Futures

On the 15th of January 2019, an investor holds an equity portfolio that is worth 15 million based on yesterdays closing prices in London Stock Exchange. The portfolio consists of UK stocks and its market beta is 0.8. The FTSE 100 index is currently at 6000.00 and the contract size is 100 times index number. The index pays a dividend of 4% per annum. The risk-free interest rate is 3% per annum.

The investor wants to hedge against future price decline of his equity portfolio for the next six months using the FTSE index futures. The current price for the futures contract on 15/01/2019 is 6010.00 and the maturity date is 15/07/2019.

1. Suggest the optimal hedging position by using the above-mentioned futures contracts.

2. If the futures price at the maturity date is 5410.00. What is the gain from holding the futures position?

3. What position would be appropriate to reduce the beta of the portfolio to 0.3?

4. Suppose that the index turns out to be 5400 at the maturity of the futures contract. What is the expected return (%) on the portfolio during the six-month period?

5. What is the expected value of the portfolio in six months including dividends and what is the total value of the position in six months?