On October 23 a company has a portfolio of stocks worth £10 million. The beta of the portfolio with respect to the FT-SE 100 is 0.80 and the FT-SE 100 Index stands at 5200. Assume the risk-free interest rate is 4.5% and the dividend yield on the FT-SE 100 is 1.5%. The company wishes to hedge the portfolio for the next two months, using FT-SE 100 Index Futures (one contract is for £10 times the Index). What should it do?
(b) Evaluate the company's position when the hedge expires assuming the FT-SE 100 on December 23, 2001 is at (i) 5350; (ii) 5190.
(c) Suppose, instead, the company wants to change the beta of the portfolio to 0.6; (ii) 1.25, for the next two months. What should it do?
