QUESTION 2 (22 MARKS)

Mawar Berhad has RM200 million portfolio and has been listed in Bursa Malaysia for 10 years. Currently, the management is worries with the market conditions with pandemic Covid-19 for almost 2 years. Therefore, the CEO of the company has asked you to enter either in futures market or options market in order to protect the risk variability in the market.

On 2nd July 2021, you bought the call option for Zizie stock for 3 months at exercise price of RM25/share and the premium is RM3/share. The contract will be expired on 31st October 2021 and you bought for 100,000 shares. After one month you bought the call, the market price is RM20/share.

On the same date, you sell a call option for Xoxo stock for 3 months and will be expired on 31st October 2021. The exercise price is RM12/share and the premium is RM1/share. When you bought the Xoxo, the market price is RM15/share and the contract is for 50,000 shares.

Required:

1. What is the rationale you sell a call option and buy a call option? When you will be In-The money (ITM)?

2. How much is the total premium to be paid and received?

3. What is your position when the market price of Zizie is RM20/share? Will you exercise the contract? Why? (Support with calculation, if any)

(6 marks)

4. Assume upon maturity, the market price for Zizie is RM25/share and Xoxo stock is RM7. What is your profit/loss?

(6 marks)