XYZ manage RM2,000,000.00 in the Malaysian Leaders fund, a portfolio comprised of blue

chip Malaysian companies. They have performed well during the year with a systematic

approach involving the replication of the index through maintaining a combination of stocks

that perform similarly to the KLSE composite index and, where possible, picking stocks that

appear to be a "good value". The portfolio currently has a beta estimated at 1.07.

In September, at a regular strategy meeting, the investment team conclude that, on the basis

of a number of technical and fundamental observations, there are extremely strong

indications the overall market is overheated and due for a severe decline in the short term.

The KLSE composite index is at 1110.50 and December KLSE CI futures are being quoted at

1115.

a. What does a beta factor measure?

b. What does the Malaysian Leaders beta of 1.07 say about the fund?

c. In September, given the market outlook described, what would be an appropriate

futures strategy to minimize risk?

During the second and third week of November, the market suffers a succession of falls, with

the result that the KLSE composite index is off 16.0 points from a high of 1165.20. The

investment team decides there has been a significant market over-reaction and that the

hedge should be lifted immediately. The portfolio now has a value of RM1,880,000.00 and

December KLSE CI futures are trading at 1003.00.

d. Assuming that the investment team decided on 80% protection, what would be the

appropriate number of futures contracts?

e. Calculate the profit and loss of the futures position

f. What was the overall result of the hedge?

g. Did the portfolio behave as the beta suggested it would? Explain your answer using

calculations.