Today, May 2022 Luxemborg Berhad are concerned about an increase in interest rate. The Finance Manager has fears with the rising prices almost of the goods in Malaysia since end of 2021. Currently, Ringgit Malaysia is weak and depreciated compared to US currency. Luxemborg also has invested portfolio of stocks and bonds in few foreign countries. He has to manage well all the portfolios domestic and foreign to avoid any unforeseen situation in the market. Current interest rate is at 5.5% per annum and the MGS August futures contract is 115.25. He decides to hedge RM20 million of FMG5 (Five-year Malaysian Government Securities) in August 2022.

Required:

1. What should the company do in order to protect its existing bond from the risk exposure? What is/are the importance of the company to enter futures market?

(4 marks)

(CLO2:PLO2:C6)

2. Recommend Luxemborg the appropriate strategy for the company to enter in the futures market.

(2 marks)

(CLO2:PLO2:C6)

3. Assume in August 2022, the interest rate unexpectedly declining by 2% and the August futures price unexpectedly rising by 0.5%, calculate the effect of your hedging strategy.

(8 marks)

(CLO2:PLO2:C6)

4. Comment on the outcome of the strategy taken. Is the company achieved its price objective?

(3 marks)

(CLO2:PLO2:C6)

5. If government need to increase the money supply, what should the government do in MGS? Explain according to either money policy or fiscal policy.

(3 marks)

(CLO2:PLO2:C6)