Question
Kim Long Resources Berhad (KLRB)s forecast monthly crude palm oil production for the June and September quarters as the following table. Month Crude Palm Oil
Kim Long Resources Berhad (KLRB)s forecast monthly crude palm oil production for the June and September quarters as the following table.
Month | Crude Palm Oil (metric tons) |
November 2019 | 8,660 |
December 2019 | 8,500 |
January 2020 | 9,500 |
February 2020 | 10,000 |
March 2020 | 7,500 |
April 2020 | 15,000 |
Part of Kim Long Resources Berhad (KLRB) investment portfolio as at 10 October 2019 includes the following:
Investment Type | Amount | Portfolio Beta | Representative Index / Security |
US Shares (equities) | US$50m | 1.5 | S&P 500 |
Short-term interest-bearing securities (ave. maturity 90 days) | US$40m | 0 | Euro Dollars |
Propose TWO option combination strategies that involve more than one option contract for the US Equities (US$ 50m), for all relevant risks faced by this portfolio. KLRBs management has expressed a desire to retain some of the upside benefits that hedging with options can permit but without paying a lot of money in option premiums. That is, your recommended strategies should provide a reasonably effective hedge but keep the option premium payment limited to a reasonable amount (it does not have to be zero!). As the strategist, it is up to you what you consider reasonable for this purpose. You must also describe the benefits and possible shortcomings of your proposed option strategies. You must use actual option data to illustrate your option strategies and to hypothetically demonstrate their benefits and shortcomings. Calculate the number of contracts required for each strategy and provide the strike prices and total premium costs.
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