Michael Douglas is an entrepreneur and has invested in Malaysia Government Securities (MGS) in few years ago. Now he wants to switch his current MGS to the new issuance with higher interest rates. Previously, he has invested about RM20 million and to switch half of the portfolio. Currently, the interest rates for 5-Year MGS is 6% and October MGS futures is 133.13. He proposed you as his advisor to switch in December 2022 and to enter the market in the next month.

Assume in December 2022, the interest rate is declining by 1% and the futures market is rising by 2%.

Required:

Suggest the appropriate strategy to enter? Why?

Construct the strategy.

Is he achieve his price objective? Evaluate.

What is/are the similarity and the differences if the trader hedge in the KLIBOR market and the bond market?