Test Two FIN541 Answer All Questions Question 1

Date: 1 Dec 2012

a) Currently, in March 2012, stock market analyst forecasts that Bursa Malaysia will continue uptrend momentum until June then the market will be back to normal. Given the current data on FKLI: June FKLI Sep FKLI 1500 1575

In June 2012, June FKLI and Sep FKLI are traded at 1510 and 1570 respectively. Outline the strategy undertaken by the spreader and calculate the profit or loss from the strategy. (8 marks) b) Explain any 4 (four) benefits of FKLI. (12 marks)

Question 2

a)

Give three (3) reasons why KLIBOR futures are traded on three-month maturity. (3 marks)

b) c)

Explain the relationship between interest rates and the KLIBOR index. (3 marks) Your company needs to borrow RM100 million by Dec 2012. Today, Sept 2012, physical 3-month KLIBOR is trading at 3.50% per annum, while FKB3 are at 96.15, 96.12 and 96.10 for Oct, Nov and Dec 2012 respectively. Your company has made arrangement to borrow at 2.75% of KLIBOR. In anticipation of rising interest rates, establish your hedging strategy by showing its benefits as measured by EIR, if as expected, both prices convergence at 4.25% per annum on the third Wednesday of Dec 2012. (14 marks)

(Total: 40 marks)