Illustrate how the market risk exposure can be reduced for Fund X. Determine the total portfolio value if the KLCI trades at 1,550 points after 3 months.

 

You are a fund manager in an investment bank. You are currently managing the risk exposure of several funds. You have collected information as follows: Fund X invests in the Malaysian equity market. It has RM5 million in value and has a beta of 1.4. Your market analyst reported an expected slowdown in the Malaysian economy due to the spread of Covid-19. You would like to reduce the market exposure of beta to 1 by using derivatives. Currently, FTSE Bursa Malaysia KLCI stands at 1,600 points. The corresponding 3-month futures (FKLI) is trading at 1,590 points with contract size of RM50 per index point. Fund Y invests in Asian equity markets. The portfolio holdings include Chinese stocks valued at RMB2 million. Currently, the relevant spot exchange rate is MYR/RMB 1.6120 (1 MYR = 1.6120 RMB). You have decided to hedge against the currency risk by using a 3-month RMB/MYR forward contract with the same exchange rate as the spot. Fund Z is a corporate pension fund. The corporate client is conservative and demands an immunisation to be applied for the fund.