You are currently managing a fund that worth RM 10 million. Suppose the FBM KLCI index is now at 1800 points. You fear that the market might be headed for short term volatility and wish to hedge for 3 months. You have the following information.

3-month KLIBOR = 8.5% annualized

FBM KLCI Dividend Yield = 2.0% per year

3-month FBM KLCI futures = 1812.69

Your portfolio beta = 1.20

a.) How many contracts would you need to be fully hedged?

b.) Outline the hedging strategy and proof that you are fully hedged even when the FBM KLCI index falls by 20% over the 3-months period