Question
Assume on 1 st November 2022, you are currently holding a portfolio of stocks worth RM 1,000,000. You wish to hedge your portfolio for 5
Assume on 1st November 2022, you are currently holding a portfolio of stocks worth RM 1,000,000. You wish to hedge your portfolio for 5 months. You have the following information:
| Portfolio beta | 1.5 |
| FBMKLCI on 1st Oct 2022 | 1390.50 |
| FBMKLCI on 1st Nov 2022 | 1400.00 |
| Malaysia Treasury Bills (Up to 3-mth) | 4% |
| Expected dividend yield | 1% |
| Index multiplier | RM50 |
| Information on FKLI on 1st Nov 2022: |
|
| FKLI Nov2022 | 1460.00 |
| FKLI Dec2022 | 1453.00 |
| FKLI Mar2023 | 1444.50 |
| FKLI Apr2023 | 1455.00 |
1. How many SIF contracts should you use to fully hedge your portfolio? [4 marks]
2. Outline the hedging strategy for your portfolio. [3 marks]
3. What is your value of the portfolio with a hedge assuming the market falls 30% at maturity? [8 marks]
4. What is your value of the portfolio with hedge assuming the market ups 50% at maturity? [2 marks]
5. From the information given above, the price of FKLI is either in contango or backwardation? Explain your selected answer [3 marks]
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Public Finance
Authors: Harvey S Rosen
7th Edition
0072876484, 978-0072876482
