As a new professional spreader, in January 2021, you are bearish with the KLIBOR futures market. You trade for RM10 million in between March 2021 and April 2021.

The KLIBOR futures quoted as in January 2021:

Bearish/Bear spread = Sell lower Buy higher

Nearby month to be bought and Distant month to be sold

Spot month 99.35

One-month 98.75

Two-months 98.27 Buy March

Three-months 97.58 Sell April

The KLIBOR futures quoted as in March 2021:

Spot month 98.66 Sell

One-month 97.11 Buy

Two-months 97.83

Three-months 98.21

Assume there is a commission charge of RM101 per round turn.

Required:

1. Calculate the spreading benefits.

(5 marks)

(CLO3:PLO5:C5)

2. Interpret the results from above. Is the strategy benefits him? Justify.

(3 marks)

(CLO3:PLO5:C3)

3. When should the trader enter the KLIBOR futures market in order to protect from the risk arising? Construct your strategy.

(5 marks)

(CLO3:PLO5:C2)

4. Elaborate the position of the players in KLIBOR cash market and in the futures market inclusive of their objectives in the cash market and in the futures market. And what would be happened if the players cannot reach their objectives? Explain.

(7 marks)