CONFIDENTIAL BM/DEC 2014/FIN645/541/651/630 UNIVERSITI TEKNOLOGI MARA FINAL EXAMINATION ‘COURSE : FUTURES AND OPTIONS/MALAYSIAN DERIVATIVES/MALAYSIAN FUTURES AND. OPTIONS ‘COURSE CODE : FIN645/541/651/630 EXAMINATION : DECEMBER 2014 TIME : 3HOURS INSTRUCTIONS TO CANDIDATES 1. This question paper consists of five (5) questions. 2. ‘Answer ALL questions in the Answer Booklet. Start each answer on a new page. 3. Do not bring any material into the examination room unless permission is given by the invigitator. 4. Please check to make sure that this examination pack consists of i) the Question Paper ji) an Answer Booklet - provided by the Faculty DO NOT TURN THIS PAGE UNTIL YOU ARE TOLD TO DO SO This examination paper consists of 5 printed pages: (© Hak Cipta Universiti Teknologi MARA CONFIDENTIALCONFIDENTIAL 2 BM/DEC 2014/FIN645/541/651/630 QUESTION 1 a) Puan Rohani was recently named as the top fund manager, who manages an equity Portfolio valued at RM82.5 million at THP Mutual Berhad. Despite the worid’s promising economic condition, she believes that the domestic market is still unstable and anticipates it to continue a downtrend till end of year 2014. Hence, she decides to fully protect her portfolio against the exposure. The portfolio has a beta of 20% above the market. She has obtained the following quotations from BMDB in early August 2014. KLCI_| August 2014 FKLI | Sept. 2014 FKLI | Dec. 2014 FKLI | Mar. 2015 FKL 1810 1815 1818 1820 1822 Suppose later at the end of 2014, the prices for both markets turn out to be as follows: KUCI | Dec. 2014 FKL | Jan. 2015 FKLI | Mar. 2075 FKLI | Jun. 2075 FKLI | 1815 1822 1824 1825 1827 i) State the strategy that she would have to implement to protect the portfolio value against the exposure. Determine the number of contracts to be traded. (4 marks) ii) Outline her strategy in detail between today and later. (4 marks) Determine the net effect from her strategy by showing her total portfolio value. (8 marks) b) Briefly explain two (2) differences between exchange-traded and over-the-counter markets. (4 marks) QUESTION 2 a) On 16" September 2014, you have contacted your old friend who is working at Bursa Malaysia Derivative Exchange. He has the current market data, which are quoted as follows: Dec. 2014 Mar. 2015 3-month 6-month ‘9-month FKB3 FKB3 KLIBOR KLIBOR KLIBOR 95.40 | 95.00 4.8% 5.2% 5.6% You believe that there are price anomalies between cash and futures markets that make it possible to profit from trading Dec 2014 FKB3, Assume later in December 2014, Dec 2014 FKB3 close at 6.0%. © Hak Cipta Universiti Teknologi MARA CONFIDENTIALCONFIDENTIAL 3 BM/DEC 2014/FIN645/541/651/630 i) Determine whether the December FKBS is fairly priced. (3 marks) ji) Create the strategy if you can borrow or lend RM1 million. (6 marks) iii) Calculate the profit or loss as a result of the strategy. (7 marks) b) Explain two (2) reasons why KLIBOR futures are mostly traded on three-month maturity. (4 marks) QUESTION 3 a) A speculator forecasts that CPO market is going to be bearish for next couple of weeks, He decides to trade 5 lots of CPO futures contracts (FCPO) at the entry price of RM3,220. The speculator is required by the Clearing House to deposit 10% of the total contract value and maintain 80% of it throughout the trading days. The daily settlement prices of FCPO for next few days are as follows: Day_ 7 2 3 4 5 Settiement Price | 3,240 3230 | 3235 | 3.225 | 3210 (RM) i) Calculate the total contract value. (2 marks) ii) Prepare the marked-to-market position based on the above information. (10 marks) Compute the total realized profit or loss from the trading. (2marks) iv) Determine the leverage effects if the trader liquidates his position on the last day. Interpret the results. (3 marks) b) Speculators play important roles in the derivatives market. Briefly explain the roles of speculators. (3 marks) (© Hak Cipta Universiti Teknologi MARA CONFIDENTIALCONFIDENTIAL 4 BM/DEC 2014/FIN645/541/651/630 QUESTION 4 a) An investment analyst is bullish about the current 5-year MGS futures and would like to take advantage of this situation. Today in June, the quotations of MGS futures are as follows: June FMG5 103.25 ‘September FMG5 102.95 December FMG5 102.70 He plans to implement a spread trade between September and December futures contracts. The spread is expected to be narrowing at maturity. i) Explain the type of spread that the analyst wishes to implement. (3 marks) ji) Justify which contract month to buy and sell (3 marks) iii) Outline the strategy if he trades 10 futures contracts in each contract month. Assume the near and distant months contracts settle at 105.65 and 110.25, respectively. (4 marks) iv) Determine the net profit or loss that the analyst would make if the commission charge is RM50 per lot. (6 marks) b) The viability and practicality of a futures market are influenced by several factors. Explain two (2) of the factors. (4 marks) QUESTION 5 The following is the information about call and put options available on Tenaga Hebat Berhad’s shares: A Call option with exercise price of RM7.00 and premium of RMO.80 A Call option with exercise price of RM8.00 and premium of RM0.40 A Put option with exercise price of RM7.00 and premium of RMO.40 A Put option with exercise price of RM7.50 and premium is RMO.60 From the information above, you are required to: a) i) Create a long straddle. ii) Draw the pay-off diagram with proper labels. iii) State the maximum profit and loss of the strategy. (8 marks) © Hak Cipta Universiti Teknolog! MARA, CONFIDENTIALCONFIDENTIAL 5 BMIDEC 2014/FIN645/541/651/630 b) i)_~— Create a short strangle. il) Prepare the pay-off table for the strategy based on the following share prices: RM5.00, RM6.00, RM6.20, RM7.00, RM8.00, RM8.80, RM9.00, and RM10.00. (12 marks) END OF QUESTION PAPER (© Hak Cipta Universiti Teknolog! MARA CONFIDENTIAL