(I)

spot price future price

Day of
trading Sett. Price Sett. Price

02/04/2012 3,572 3,501

03/04/2012 3,580 3,499

04/04/2012 3,590 3,520

05/04/2012 3,600 3,532

06/04/2012 3,639 3,577

09/04/2012 3,616 3,556

10/04/2012 3,645 3,589

12/04/2012 3,596 3,540

13/04/2012 3,568 3,497

16/04/2012 3,498 3,462

17/04/2012 3,515 3,482

18/04/2012 3,500 3,460

19/04/2012 3,495 3,460

20/04/2012 3,515 3,490

23/04/2012 3,498 3,469

24/04/2012 3,473 3,449

25/04/2012 3,513 3,490

26/04/2012 3,510 3,484

27/04/2012 3,486 3,486

30/04/2012 3,472 3,444

Average 3,544 3,499

Price Convergence
3,700
3,650
3,600
3,550
3,500
3,450
3,400 spot price Sett. Price
3,350 future price Sett. Price
3,300

Day of Trading
(b) Risk free rate= 3.057%

Storage cost = 5%

Convenience yield =3%

3
T= 12

𝐹0 = 𝑆0 𝑒 (𝑟+𝑢−𝑦)𝑇
3
𝐹0 = 3,544𝑒 (3.057%+5%−3%)12

𝐹0 = RM 3589.09

(c) Average future price for next three month contract traded in the market = RM 3499
The future price is lower than the theoretical price =RM 3499 <RM 3589.90
So the future price is under price and good to buy
(II)

(a) 500 x 100= 50,000

𝑃
(b) 𝑁 = 𝛽 (𝐴)

1,000,000
𝑁=( )
50,000

N = 20 contract for every one million of portfolio

Ang should sell rather than buy the contract because he believes that the stock market
will decline. Sell the contract will let him make gain after the market decline. Therefore,
He can use the gain to cover the loss he made in his sizable portfolio.

(c) The amount of cash put up to meet the margin requirement

(20 x $2,000) = 40,000
The interest lost from the margin requirement
2
40,000 (6% x 12
) = $400

(d) When the market declined 5%, the value of the contract
95 x 500 = 47,500

Number of contract needed

1,000,000
𝑁=( )
47,500
N = 21 contract needed

The amount of cash to put up

21 x $2000 = 42,000

Ang cannot take funds out of the position to cut the interest lost but need to add in
cash to meet up the new margin requirement.
(e) $ 1,000,000 x 5% = $50,000

1,000,000
(f) 𝑁 = 0.75 ( 50,000
)
N = 15 contract

Ang could hedge his position by selling fewer contracts when the beta of the portfolio
was less than 1.0. It is because when the beta is less than one, the risk of the portfolio is
less according to the market portfolio. Stock affected less seriously by the systematic
risk. The fluctuation of the portfolio is lower than the market portfolio. If this is the case,
Ang can hedge his position by selling fewer contracts.

(g) The gains on the portfolio when the market increase 10 %,

$1,000,000 x 7.5%= $ 75,000

The losses on the contracts when the markets increase 10 %,

(100-90) x 500 x 15 = $ 75,000

The net profit or loss,

$75,000 - $75,000 = $0
There is $0 profit and loss.

(h)