CONFIDENTIAL

BM/APR 20 08/FIN/541/6 51/630

UNIVERSITI TEKNOLOGI MARA FINAL EXAMINATION

COURSE CODE EXAMINATION TIME

: : : :

MALAYSIAN DERIVATIVES/MALAYSIAN FUTURES AND OPTION FIN541/651/630 APRIL 2008 3 HOURS

INSTRUCTIONS TO CANDIDATES 1. 2. 3. 4. This question paper consists of five (5) questions. Answer ALL questions in the Answer Booklet. Start each answer on a new page. Do not bring any material into the examination room unless permission is given by the invigilator. Please check to make sure that this examination pack consists of: i) ii) the Question Paper 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

BM/APR 2008/FIN541/651/630

QUESTION 1 a) Explain the term "leverage" in the context of futures markets. (3 marks) b) Based on the following information, show in percentage terms the approximate extent of leverage available. Contract FCPO FKB3 FKLI Initial Margin RM20.000 RM750 RM6.000 Current Futures Price/Index RM3.330/MT RM1,000,000 1,470 points (7 marks) c) In March 2008, a fund manager receives notification of borrowing requirement totalling RM100 million for a period of 3 months. Anticipating that inflation rates will increase, he decides to hedge his position. Current interest rate is 5.80% and June futures contract is at 94.0. Later in June, interest rate moves up to 6.5%. Show the effect of such action and identify what is the fund manager's eventual effective interest rate. (10 marks) QUESTION 2 a) What is basis risk? (2 marks) b) For each of the following scenario, state which type(s) of basis risk applies, if any. Briefly explain your answer. i) Hedging a Malaysian stock portfolio against a drop in share prices with the KLCI futures contract. (1.5 marks) Hedging a future investment in Negotiable Certificate of Deposits (NCDs) with a three-month KLIBOR futures contract. (1.5 marks) Hedging a forward sale of palm kernel oil expected in February 2008 with the March 2008 palm kernel oil futures contract. (1.5 marks)

ii)

iii)

Hak Cipta Universiti Teknofogi MARA

CONFIDENTIAL

CONFIDENTIAL

BM/APR 2008/FIN541/651/630

c)

A speculator shorts 4th April CPO futures contract for RM3,110 per MT. Suppose that over the next five days, the futures price evolved as follows: Day 1 2 3 4 5 Futures Price 3120 3108 3112 3110 3108

On the fifth day, the trader decides to liquidate his position at RM3108 per MT. o Calculate the contract value of the CPO futures contract. (2 marks) ii) If the initial margin is 10% of contract value and the maintenance margin is 80%, show the margin balance of the trader's account. (8 marks) Is there any margin call? If yes, by how much? (1.5 marks) iv) What is the total profit or loss that the trader makes from such speculative trading? (2 marks)

iii)

QUESTION 3 a) Explain briefly the four (4) functions of the Bursa Malaysia Derivatives Clearing Berhad. (4 marks) What are the four (4) differences between trading in the stock market and futures market? (4 marks) It is early January and you believe that quotations of KLCI futures in BMDB are mismatched. Currently the spot index is quoting at 1480 while February futures are at 1550. Assuming you have RM1,000,000 and the expected average dividend yield and risk-free rate are 3.5% and 6.5% respectively; i) ii) iii) calculate the theoretical futures price. (2 marks) is there any opportunity for you to make a profit? If yes, how would you go about it? (2 marks) show the results of your strategy taken in (ii). (8 marks)
CONFIDENTIAL

b)

c)

Hak Cipta Universiti Teknologi MARA

CONFIDENTIAL

BM/APR 2008/FIN541/651/630

QUESTION 4 a) When trading options, why do brokers require margin from their clients when they write options, but not when they buy options? Explain briefly. (5 marks) An investor foresees that the KLCI index will fall in the near future, what kind of option should the investor trade? (3 marks) Suppose the options on Telekom stock has the following exercise prices and premiums: Exercise Price RM9.00 put RM9.00 call RM9.25 call RM9.25 put Premium 0.40 sen 0.70 sen 0.40 sen 0.70 sen

b)

c)

Based on the above information, explain how can options be used to create a bull spread and a bear spread? (8 marks) ii) Sketch the payoff diagram for the bull spread and bear spread. (4 marks)

QUESTION 5 a) Explain the important roles that arbitrageurs play in the derivatives markets. (4 marks) b) A trader is bearish about the underlying market and wishes to establish a position that would be profitable for him. He foresees that the distant contract month will fall more than the nearby month. i) As a friend who is an expert in derivatives, what strategy would you advice him to take and why? (4 marks)

Hak Cipta Universiti Teknologi MARA

CONFIDENTIAL

CONFIDENTIAL

BM/APR 2008/FIN541/651/630

ii)

Based on the following information, show the trader the profits or losses that he would make from such strategy. February 13, 2008 March FMG3 Contract June FMG3 Contract March 19, 2008 March FMG3 Contract June FMG3 Contract

113.12 113.05

112.55 112.26 (12 marks)

END OF QUESTION PAPER

Hak Cipta Universiti Teknologi MARA

CONFIDENTIAL