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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) 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%. BURSA MALAYSIA DERIVATIVES (As on 30 March 2020) Contract code: FKLI MONTH OPEN HIGH LOW LAST ol VOLUME Mar 2020 1370.50 1380.00 1369.00 1370.00 20161 6637 Jun 2020 1368.50 1390.00 1366.00 1368.55 136 46 Sep 2020 1365.5 1368.1 1359.50 1364.2 28 8 (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) 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%. BURSA MALAYSIA DERIVATIVES (As on 30 March 2020) Contract code: FKLI MONTH OPEN HIGH LOW LAST ol VOLUME Mar 2020 1370.50 1380.00 1369.00 1370.00 20161 6637 Jun 2020 1368.50 1390.00 1366.00 1368.55 136 46 Sep 2020 1365.5 1368.1 1359.50 1364.2 28 8 (8 marks)