A portfolio manager currently holds a portfolio worth RM8 millions.

The
portfolio returns closely matches the returns to the Bursa Malaysia
composite index. The portfolio manager expects the market to experience a
downtrend in the short to medium term and decided to hedge against this
expectation. The KLCI is currently trading at 1,060 points and FKLI at 1,075
points respectively. The portfolio manager has to
________________________ to partially hedge of seventy percent (70%) of
his position. (Assume 1 tick = RM25)
(A)
(B)
(C)
(D)

sell 104 FKLI futures contracts

sell 105 FKLI futures contracts
sell 148 FKLI futures contracts
sell 150 FKLI futures contracts

Solution justification:
(A)

8,000,000 x 0.70 = 104 contracts

1,075 x RM50

(B)

8,000,000
x 0.70 = 105 contracts
1,060 x RM50

(C)

8,000,000
1,075 x RM50

= 148 contracts

(D)

8,000,000
1,060 x RM50

= 150 contracts

You are currently holding a portfolio of stocks worth RM43,750,000 at the

beginning of February. You wish to partially hedge your portfolio in 4 months time
due to market uncertainty. You have the following information:
Portfolio beta
Spot index value
Risk free rate
First SIF contract month
Second SIF contract month
Third SIF contract month
Fourth SIF contract month
Hedging percentage
1 tick

0.90
1,080 points
5% per year
1,085.0 points
1,090.5 points
1,095.0 points
1,100.5 points
80%
RM25

How many stock index futures (SIF) contracts should you use to hedge your
portfolio?
(A)
(B)
(C)
(D)

572 contracts
575 contracts
577 contracts
580 contracts

Solution justification:
(A) RM43,750,000 x 0.90 x 0.80 = 572 contracts
1,100.5 x RM50
(B) RM43,750,000 x 0.90 x 0.80 = 575 contracts
1,095.0 x RM50
(C) RM43,750,000 x 0.90 x 0.80 = 577 contracts
1,090.5 x RM50
(D) RM43,750,000 x 0.90 x 0.80 = 580 contracts
1,085.0 x RM50

Assume today is 3rd of December and your market expectation that the market will
be bullish for the next three weeks on a new year bargain hunting. The spot month
stock index futures (SIF) is now at 1,121 points and 2 nd SIF contract month is at
1,139 points. Assume after three weeks, the December contract month is at 1,148
and January contract month is at 1,152.
What is your spread strategy today if you wanted to take advantage of this price
movement that maximize profit?
(A)
(B)
(C)
(D)

Long 1 December contract and long 1 January contract

Long 1 December contract and short 1 January contract
Short 1 December contract and long 1 January contract
Short 1 December contract and short 1 January contract

Solution justification:
(A)
(B)
(C)
(D)

Not a spread strategy

Spread strategy that maximize profit
Spread strategy but did not maximize profit
Not a spread strategy

How much profit do you make from the above spread strategy transaction?
(assume 1 tick = RM25)
(A)
(B)
(C)
(D)

Profit RM350
Profit RM700
Profit RM1,000
Profit RM2,000

Solution justification:
(A) (1148-1121) (1152-1139) = 14 points x RM25 = RM350
(B) (1148-1121) (1152-1139) = 14 points x RM50 = RM700
(C) (1148-1121) + (1152-1139) = 40 points x RM25 = RM1000
(D) (1148-1121) + (1152-1139) = 40 points x RM50 = RM2000

Given the information below, calculate the correct price for the stock index
futures December contract (153 days to maturity) and determine whether
the stock index futures is over-priced or under-priced. (assume 1 year =
365 days)
Spot price for KLCI on 21st July

1150

Risk free rate

4%

Dividend yield

2.6 %

FKLI December contract

1161

(A)
(B)
(C)
(D)

RM1,156.5 over-priced
RM1,156.5 under-priced
RM1,182.0 over-priced
RM1,182.0 under-priced

Solution justification:
(A) 1150 + [1150 x (0.04 0.026) x (153/365)] = RM1,156.5
Since 1156.5 fair values is smaller than 1161, so 1161 is over-priced.
(B) Under-priced is wrong
(C) 1150 + [1150 x (0.04 + 0.026) x (153/365)] = RM1,182.0
*(0.04 + 0.026) is wrong
(D) 1150 + [1150 x (0.04 + 0.026) x (153/365)] = RM1,182.0
*(0.04 + 0.026) is wrong

i) 1st contract month is February

2nd contract month is March
3rd contract month is June
4th contract month is September
ii) June, since the new funds will only be available in four months time from Feb.
iii) Number of contracts required = 8,000,000
50 x 926.5
= 172.693
= 172 contracts
iv) Minimum margin requirement = 172 x 1,200 = 206,400

v) Profit on futures = (953.0 926.5) x 50 x 172

= 227,900
OR
Stock Market
Feb
Expect to receive RM8,000,000 in
June with which to buy stock
June
Received 8,000,000, stock market
has risen 5% making the acquisition
cost of the stock more expensive

Future Market
Feb
Buys :172 June @ 926.5
Value:172 x 50 x 926.5
= 7,967,900
June
Sells :172 June @ 953.0
Value:172 x 50 x 953.0
= 8,195,800

Profit on futures = 8,195,800 7,967,900 = 227,900

vi) Anticipatory hedging

i)

Partially hedging a current market position

ii)

Contract needed = 4,500,000 x 80%

50 x 926.5
= 77.71
= 77 contracts

iii)

Gain made from the futures transaction

= (926.5 915.5) x 77 x 50
= RM42,350
OR
Share Market
Feb
Holds RM4,500,000 portfolio
KLSE CI stands at 918.0
May
KLSE CI stands at 907.0
Portfolio value has fallen to 4,450,000
(a drop of RM50,000)

Futures Market
Feb
Sells : 77 June @ 926.5
Value: 77 x 50 x 926.5
= 3,567,025
May
Buys : 77 June @ 915.5
Value: 77 x 50 x 915.5
= 3,524,675

Gain made from futures = 3,567,025 3,524,675

= RM42,350
iv)

Loss from hedging strategy = 42,350 50,000

= (7,650)
(By hedging, the portfolio depreciated only by RM7,650 because it was
being offset by the profit in the futures transaction, without hedging the
portfolio will drop in value by RM50,000.)

v)

(926.5 915.5) = 11 points x 2 = 22 ticks