Mr Joseph is a millionaire, and being announced as the top 3 the richest people in Malaysia in 2020. He has a lot of businesses domestic and abroad. He went to your company to get an advice how to protect his portfolio from instability of the market currently. He wants you to manage his portfolio worth RM100 million. You advise him to hedge in the futures market in and you are bullish in the near future. You believed that when the government opened all the economy sectors and encourage for the tourism, people can inter-state, it will recover the economic slowly until early of next year. The people will start demanding and the money circulation in the market would be increased.

You interested to hedge between now (October) and March 2021 for 1700 contracts in the futures market. Assume when you close the position in March 2021, both markets are declining by 0.8%. Besides, you want to long call option for AA stock for three months at exercise of RM23 per share and the premium is RM2 per share. In addition, you long put option for ZZ stock for three months at exercise price of RM15 per share and the premium is RM1.10 per share. Both options initiates on 2^nd October 2021.

Assume after one month, both stocks are declining by 5% and after 2 months the price increase by 10% and upon maturity the price increase to RM30 for AA stock and RM20 for ZZ stock.

Required:

1. What is the appropriate hedging strategy and the rationale you enter this hedging strategy?

(4 marks)

(CLO2:PLO2:C6)

2. Assess your hedging strategy and do you achieve your price objective? [Hint: To short screen the price for both FKLI and KLCI from any website to show for the price you are taken. Advise to use Bursa Malaysia, Yahoo finance, Market watch websites and etc]

(8 marks)

(CLO2:PLO2:C6)

3. Construct from both options when you will be In-The-Money, At-The-Money and Out-of-The-Money based on the above situations.

(8 marks)

(CLO2:PLO2:C6)

4. Evaluate either you should exercise or should not from your findings in (c). Recommend the best strategies.