financial drivatives I want to answer in manual
QUESTION 3.(20 marks) You are a reputable fund manager who manages Equity Excellent Fund. This objective of this Equity Excellent Fund is to invest in high risk global and local equities with the aim to generate competitive expected return. However, due to the high unemployment rate in the U.S. and pessimistic economic outlook, a recession is expected to happen next year. Now, you plan to change your investment strategy to reduce the beta of the stocks that you manage under the Equity Excellent Fund to 1.2. The fund size of the Excel Equity Fund is RM9 million and currently, the current beta of this fund is 1.8. Now is December 2019 and the Kuala Lumpur Composite Index (KLCI) is standing at 1589 points. (a) What risk do you face when you hold a portfolio in the stock market? Explain how you can reduce the risk you face without trading the stocks physically in the stock market. (6 marks) Continued... (b) Followings are the quotes from Bursa Malaysia Derivatives: BURSA MALAYSIA DERIVATIVES (As on December 2019) Contract code: FKLI MONTH OPEN HIGH LOW LAST Dec 2019 1592.50 1595.00 1590.00 1591.50 Mar 2020 1450.50 1460.00 1448.00 1500.00 Jun 2020 1350.50 1391.50 1349.00 1391 50 OI VOLUME 24099 7.968 161 37 36 6 Outline your strategy (state the position, number of contracts, which contract month, and the price of the contract) if you would like to reduce the risk you face until March 2020. (Note: use the future last price to calculate the number of contracts) (6 marks) (c) Suppose on 30th March 2020, you want to close out your position in the futures market and you observe the following quotes. Show the result of your hedging in a 4-quadrant table for both cash and futures market as of December 2019 and on 30th March 2020. Calculate the profit or loss in both markets. The KLCI drops by 5% VOLUME BURSA MALAYSIA DERIVATIVES (As on 30 March 2020) Contract code: FKLI MONTH OPEN HIGH LOW LAST OI lar 2020 1370.50 1380.00 1369.00 1370.00 20161 Jun 2020 1368.50 1390,00 1366.00 1168.55 136 13655 1368.1 1359.50 13642 28 6637 Sep 2020 & (8 marks) QUESTION 3.(20 marks) You are a reputable fund manager who manages Equity Excellent Fund. This objective of this Equity Excellent Fund is to invest in high risk global and local equities with the aim to generate competitive expected return. However, due to the high unemployment rate in the U.S. and pessimistic economic outlook, a recession is expected to happen next year. Now, you plan to change your investment strategy to reduce the beta of the stocks that you manage under the Equity Excellent Fund to 1.2. The fund size of the Excel Equity Fund is RM9 million and currently, the current beta of this fund is 1.8. Now is December 2019 and the Kuala Lumpur Composite Index (KLCI) is standing at 1589 points. (a) What risk do you face when you hold a portfolio in the stock market? Explain how you can reduce the risk you face without trading the stocks physically in the stock market. (6 marks) Continued... (b) Followings are the quotes from Bursa Malaysia Derivatives: BURSA MALAYSIA DERIVATIVES (As on December 2019) Contract code: FKLI MONTH OPEN HIGH LOW LAST Dec 2019 1592.50 1595.00 1590.00 1591.50 Mar 2020 1450.50 1460.00 1448.00 1500.00 Jun 2020 1350.50 1391.50 1349.00 1391 50 OI VOLUME 24099 7.968 161 37 36 6 Outline your strategy (state the position, number of contracts, which contract month, and the price of the contract) if you would like to reduce the risk you face until March 2020. (Note: use the future last price to calculate the number of contracts) (6 marks) (c) Suppose on 30th March 2020, you want to close out your position in the futures market and you observe the following quotes. Show the result of your hedging in a 4-quadrant table for both cash and futures market as of December 2019 and on 30th March 2020. Calculate the profit or loss in both markets. The KLCI drops by 5% VOLUME BURSA MALAYSIA DERIVATIVES (As on 30 March 2020) Contract code: FKLI MONTH OPEN HIGH LOW LAST OI lar 2020 1370.50 1380.00 1369.00 1370.00 20161 Jun 2020 1368.50 1390,00 1366.00 1168.55 136 13655 1368.1 1359.50 13642 28 6637 Sep 2020 & (8 marks)
