Consider the following scenario then answer the question below.

Stock market

Futures market

January

KLSE composite index at 1162. Investor expects to purchase a RM10 million stock portfolio in two months' time.

Buys March KLSE CI contracts at 1158.

March

KLSE composite index has risen to 1171, making the acquisition costs of the shares more expensive.

Sells March KLSE CI contracts at 1173.

a. Explain why the investor has undertaken this particular hedging strategy.(5 marks)

b. Assume that the investor wants to cover the full value of their expected investment. How many March KLSE CI futures contracts must they purchase? Assume that the beta factor is 1.25. (7 marks)

c. Calculate the profit/loss on the futures transaction. (8 marks)