You work at ABC Stock Brokers Sdn. Bhd. as a remisier. A wealthy foreign client, Mr. J who is bullish about Malaysian stocks wants to establish an exposure in the local equity market. The FBM KLCI is now January 2021 at 1700 points. Assuming at-the-money FBM KLCI put and call options are being quoted at 3 points and 4 points, respectively.

Summary of the derivatives contract:

Initial margin= 10% from contract size

Cost / Brokerage fees: Futures and options =RM20 per contract transaction;

KLCI Futures- March contract = 1800 point

Call and Put option will expire in March 2021.

Contract specification; Futures; I tick= RM50; Options 1 tick=RM50.

You also may refer contract specifications of KLCI Futures at: https://www.bursamalaysia.com/trade/our_products_services/derivatives/equity_derivatives/ftse_bursa_malaysia_klci_futures

a) Assuming Mr. J is willing to invest up to RM 1 million in Malaysia financial market. State three ways by which the client can get the exposure to Malaysian equities that he wants.) 

b) Design the strategy for the two investment/ trading by demonstrate the appropriate size of the contract, the approximate transaction cost and the payoff if FBM KLCI move up to 1850 in March 2021. 

c) In determining the best alternative to recommend to your client, what two factors should you consider?) 

 A trader who is long RM 20 million of Malaysian stocks goes long FBM KLCl calls and short KLCI puts. (both the calls & puts are at-the-money)

a) Discuss the situation above whether it can be considered as a hedge position. 

b) Explain what must Mr Za market outlook? 

c) Explain the payoff of Mr. Za's strategy if the market moves down)