FIN 4780

Group 5
Chapter 4: Q 16,18,19
Group Members:
Ahmad Sirajuddin Helmi Bin Abd Rajes 1429041
Mohamad Wafiy Bin Mohd Wary 1422033
Umar Ukasah Bin Abdul Halim 1424289
Syahrul Aman Bin Ismail 1427215
Muhammad Zaki Bin Norman 1428291
Abdul Azim Nadzri Bin Abdul Hafiz 1429997
Question 16:
What are Single Stock Futures (SSF)? What are some of their common uses?
What criteria do you think would be used by Bursa Malaysia in deciding on
whether to introduce SSF contracts on a particular stock?

Answer: Criteria used by Bursa Malaysia:

SSF are a type of equity derivatives. -Must be blue-chip stocks (stable)

-It is a futures contract on an individual stock -Have large market capitalization
i.e. those with the stock of a company as -Good liquidity
the underlying asset
-Cash settled at maturity

Their common uses:

-Hedging
-Arbitraging
-Speculating
Question 18:
An Investor has 12 stocks in his portfolio. The stock with the highest beta of his
portfolio is Genting Bhd, while Telekom has the lowest beta in his portfolio.

A) If the investor wants to temporarily increase the overall beta of his

portfolio without buying or selling stocks, how he can do so with SSFs?

B) How can the investor use SSFs to reduce the beta of his portfolio?

C) Suppose the investor goes long on 3-month SSF contracts on Telekom

while simultaneously shorting Genting Bhd. SSFs, what is the impact of this
paired-trade on the beta of his portfolio
Answer

To adjust overall portfolio beta: Impact of the paired-trade on beta of his portfolio:
Adjust the beta of a single stock in the portfolio
A) To increase overall beta :
*Paired-trade – Perform two positions
Long SSF Contract (Genting) simultaneously
*Position must be opposite
B) To decrease the beta:
i.e. one position long, the other one must be short
Short SSF Contract (Genting)

If, Long Telekom , Increases Beta slightly

If, Short Genting, Reduces Beta significantly

Overall beta will drop below its original level.

Maxis Bhd. shares just went ex-dividend. The next dividend payment is at
least 6 months away. The risk-free rate is 6.5%. You notice the following
quotes.

Maxis Bhd. stock price = RM 9.50

3-month SSF contract on Maxis Bhd. = RM 9.85

a) Prove that SSF contract is mispriced

b) Outline the appropriate arbitrage strategy
c) If you invest an amount equal to about 10,000 shares, what would your
profit be at SSF maturity if Maxis Bhd. stock is higher by 10%?
d) What would your profit be if Maxis Bhd. stock fell 10% instead?
e) Rework parts (a), (b) and (c) above assuming the 3-month SSF contract is
being quoted at RM 9.55
 Solution Position Position @ Profit/Loss
Today Maturity
Short 10 SSF 98,500 (104,500) (6,000)
a) SSF = (1+ rf – d) ^ t
Long Maxis (95,000) 104,500 9,500
Borrow RM 95,000 (96,543.75) (1543.75)
= 9.50 (1+0.065-0)^(0.25) 95,000 @
6.5%
=9.65
Net 1956.25

9.65 vs 9.85 1 contract = 1000 shares (Source; Bursa Malaysia)

95,000/1000 x 9.50 = 10 contracts
*Overpriced by 0.2
10,000 Shares x RM 9.85 = 98,500
b) Short futures(SSF), long Maxis
10,000 shares x (1.1 x 9.5) = 104,500

[1 + (6.5%/4)]x 95,000 = 96, 543.75

 Solution Position Position @ Profit/Loss
Today Maturity
Short 10 SSF 98,500 (85,500) 13,000
a) SSF = (1+ rf – d) ^ t Long Maxis (95,000) 85,500 (9,500)
Borrow RM 95,000 (96,543.75) (1543.75)
= 9.50 (1+0.065-0)^(0.25) 95,000 @
6.5%
=9.65
Net 1956.25
1 contract = 1000 shares (Source; Bursa Malaysia)
b) Short futures(SSF), long Maxis 95,000/1000 x 9.50 = 10 contracts

10,000 Shares x RM 9.85 = 98,500

10,000 shares x (0.9* x 9.5) = 85,500

Price reduces by 10%

[1 + (6.5%/4)]x 95,000 = 96, 543.75

Solution Position Position @ Profit/Loss
Today Maturity
Long 10 SSF (95,500) 104,500 9,000
a) SSF = (1+ rf – d) ^ t
Short Maxis 95,000 (104,500) (9,500)
Borrow RM 95,000 (96,543.75) (1543.75)
= 9.50 (1+0.065-0)^(0.25) 95,000 @
6.5%
=9.65
Net (2043.75)
1 contract = 1000 shares (Source; Bursa Malaysia)
9.65 vs 9.55 95,000/1000 x 9.50 = 10 contracts

*Underpriced by 0.10 10,000 Shares x RM 9.55 = 95,500

10,000 shares x (1.1 x 9.5) = 104,500

b) Long Futures, Short Maxis
[1 + (6.5%/4)]x 95,000 = 96, 543.75
Solution Position Position @ Profit/Loss
Today Maturity
Long 10 SSF (95,500) 85,500 (10,000)
a) SSF = (1+ rf – d) ^ t
Short Maxis 95,000 (85,500) 9,500
Borrow RM 95,000 (96,543.75) (1543.75)
= 9.50 (1+0.065-0)^(0.25) 95,000 @
6.5%
=9.65
Net (2043.75)
Underpriced by 0.10 1 contract = 1000 shares (Source; Bursa Malaysia)
95,000/1000 x 9.50 = 10 contracts

b) Long Futures, Short Maxis 10,000 Shares x RM 9.55 = 95,500

10,000 shares x (1.1 x 9.5) = 104,500

[1 + (6.5%/4)]x 95,000 = 96, 543.75

Thank You