Pigeon Plc holds a well-diversified portfolio of shares with a current market value on 1 May 2014 of £900 000.On this date Pigeon Plc decides to hedge the portfolio by taking a sell position in ten FTSE 100 IDX futures units.The FTSE 100 IDX is 2980 on 1 May 2014.A unit contract in FTSE 100 IDX futures is priced based on FTSE 100 IDX and a price of £25.The futures broker requires a deposit of £1500.On 30 June the FTSE 100 IDX has fallen to 2570 and the value of the company's share portfolio has fallen to $790 000.What is the gain or loss on the futures contract and the net gain or loss after hedging?

Question

Quizplus · Accepted Answer

The gain on the futures contract is calculated as the difference in the index value multiplied by the contract size and number of contracts: (2980 - 2570) * £25 * 10 = £102,500. The net loss after hedging is the loss in the portfolio value minus the gain on the futures: (£900,000 - £790,000) - £102,500 = £7,500.

Pigeon Plc Holds a Well-Diversified Portfolio of Shares with a Current