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Fin645 Final Assessment

1. The bank will take a short position in the futures market by selling Malaysian government bond (MGS) futures contracts at the current price, expecting interest rates and bond prices to fall in the future. 2. When the futures contracts expire, the bank will buy back the contracts at a lower price, earning a profit that will offset losses from having to sell its MGS holdings at a lower price. 3. By hedging its cash position in the bond market using futures contracts, the bank is able to lock in a profit and reduce risk from an adverse movement in interest rates and bond prices.

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1K views3 pages

Fin645 Final Assessment

1. The bank will take a short position in the futures market by selling Malaysian government bond (MGS) futures contracts at the current price, expecting interest rates and bond prices to fall in the future. 2. When the futures contracts expire, the bank will buy back the contracts at a lower price, earning a profit that will offset losses from having to sell its MGS holdings at a lower price. 3. By hedging its cash position in the bond market using futures contracts, the bank is able to lock in a profit and reduce risk from an adverse movement in interest rates and bond prices.

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© © All Rights Reserved
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FIN645 FINAL ASSESSMENT

Q2.

The interest rate is expected to increase and will make the price to fall. The bank will undertake short
position, sell higher today and buy lower later. Profit from the futures market will be used to cover the
losses in the cash market.

1.
2. Noc = 100,000,000 / 100,000 = 1000 contracts
3.  Outline strategies
4.

Cash market Future market


Open position:
Bank intend to sell Rm100 million MGS
Bond in September.
Sell 1000 contracts of
September MGS @ 114.25
today Current price: 115

(Expect interest to rise, price to fall,


therefore sell at futures market today)
Close out:
Bank sells RM100 million September
MGS.
Buy 1000 Ccontracts of
Later
Sepember MGS @ 113.25
Interest rate rises making the bond price
to 114

1.  Futures profit = (114.25 – 113.25) x 1000 x 100 x 10 = 1,000,000


2.  Cash position = (114 -115) / 115 x 100,000,000 = -869,565.22
3. Net effect = 1,000,000 – 869,565.22 + 100,000,000 = 100,130,434.8

With hedging Without hedging


Beginning portfolio 100,000,000 100,000,000
Futures profit 1,000,000 -
Cash position (869,565.22) (869,565.22)
Ending portfolio value 100,130,434.8 99,130,434.78
3)

1. Initial margin = 7000 x 20 = 140,000


2. maintenance margin = 80% x 140,000 = 112,000
3.

Day Closing price Floating P/L Variable margin


0 1855 - 140,000
1 1870 1870 – 1855 x20x 100 x 10 =  300,000 440,000
2 1835 1835 – 1870 x 20x 100 x10 = -700,000 (260,000)
3 1862 1862 – 1835 x 20x 100 x 10 = 540,000 280,000
(1853 – 1862) x 20 x 100 x 10 = -
4 1853 (270,000)
550,000

4.
5. leverage effect

i. Percentage change in price = (1853 -1855) / 1855 x 100 = -0.11%


ii. Percentage change in return = (-270,000 – 140,000)/140,000 x 100 =

iii)  Since the  Malaysian market is expected to outperrform the Japanese market, then by KLCI futures
and sell Nikkei-225 futures

(w1) Value of Nikkei futures contract

18,000 x 1000 = 18,000,000

yen 100 = Rm 4.00, Yen 1 = Rm 0.04

Yen 18,000,000 x Rm 0.04 = 720,000

(w2) Value of KLCI futures contract

1800 x 50 = 90,000

NOC = 720,000/90,000 = 8 contracts

Thus, for every  1 contract of Nikkei-225 futures sold, trader will buy 8 contracts of KLCI futures.

Nikkei-225 KLCI Futures


Sell 1 contract Nikkei-225 @ BUy 8 contracts KLCI Futures @
today
18,000 1,800
Buy 1 contract Nikkei-225 @ Sell 8 contracts KLCI Futures @
later
19,000 1,880

Nikkei-225 futures = ( 18,000 – 19,000) x 1 x Yen1000 = (Yen1,000,000)

In RM= Yen1,000,000 x Rm0.04 = (RM40,000)

KLCI Futures = (1,880 – 1,800) x 8 x 50 = RM32,000

Spread profit/ loss = 32,000 – 40,000 = (RM8,000)

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