Q1

A trader takes a view that March KLSE CI futures which are currently trading at 1158.60 are about to enter a downtrend.

a. Should the trader go long or short futures. (3 marks)

b. Assuming the trader maintains their original position until expiry and the cash settlement price is 1125.40, what will be the profit/loss?. The contract size is RM50/contract. (4 marks)

Q2

Is it possible to make a gain if the KLSE CI futures price islowerthan the theoretical "fair" price given by the cost of holding stock? If so, describe the strategy a trader could use in this situation. (3 marks)

Q3

Assume an investor takes a long position in 2 September KLSE CI futures contract on 17thJuly. The futures contract price is RM1613.00 The initial margin and maintenance margin are RM6,000/contract and RM4,000.00/contract respectively. The trader closes his position on the fifth day. The futures settlement prices during those five days are:

Day 1RM1611.00

Day 2RM1615.00

Day 3RM1620.00

Day 4RM1610.00

Day 5RM1608.00

The contract size is RM50/contract.

a. Determine the trader's total gains or losses. (12 marks)

b. How much does the trader pay (if any) for "margin call" ? (6 marks)

Q4

Assume it is now January 2020 and the KLSE composite index is at 1146. The risk-free interest rate is 5% p.a. The weighted average dividend yield of the KLSE composite index is 2.3% p.a. What would be the fair value of the June 2020 KLSE CI futures contract? Maturity is 6 months. (10 marks)

Two answer are required.First, assume that the interest is continuous compounding and the second, interest rate is assume non-continuous compounding ( i.e.simple interest).

Q5

Consider the following scenario then answer the question below.

Stock Market

January - KLSE composite index at 1162. Investor expects to purchase a RM10 million stock portfolio in two months' time.

March - KLSE composite index has risen to 1171, making the acquisition costs of the shares more expensive.

Futures Market

January - Buys March KLSE CI contracts at 1158.

March - Sells March KLSE CI contracts at 1173.

a. Explain why the investor has undertaken this particular hedging strategy.(5 marks)

b. Assume that the investor wants to cover the full value of their expected investment. How many March KLSE CI futures contracts must they purchase? Assume that the beta factor is 1.25. (7 marks)

c. Calculate the profit/loss on the futures transaction. (8 marks)