CONFIDENTIAL, BM/DEC 2015/FIN645/541/651/630 UNIVERSITI TEKNOLOGI! MARA FINAL EXAMINATION COURSE : FUTURES AND OPTIONS/ MALAYSIAN DERIVATIVES / MALAYSIAN FUTURES AND OPTIONS COURSE CODE : FING45/541/651/630 EXAMINATION : DECEMBER 2015 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 invigiiator. 4, Please check to make sure that this examination pack consists of i) the Question Paper ii) an Answer Booklet - provided by the Faculty 5. ‘Answer ALL questions in English, DO NOT TURN THIS PAGE UNTIL YOU ARE TOLD TO DO SO This examination paper consists of 6 printed pages (© Hak Cipta Universiti Teknologi MARA CONFIDENTIALCONFIDENTIAL 2 BM/DEC 2015/FIN645/541/651/630 QUESTION 1 a) b) ‘The weakening of Malaysian Ringgit against major world currencies is expected to benefit Malaysian exporters. Palm oil futures (FCPO) price is on the uptrend as export is foreseen to be rising with the weakening Ringgit. Encik Daniel, a trader with Ken Futures Sdn. Bhd. intends to capitalize on this trend. He secured 20 contracts of November FCPO at RM2030 today, 1" September 2015. Currently, Bursa Malaysia Derivative Clearing House set the initial and maintenance margin at the same level of RM4,500 per contract. The following table shows the market report for FCPO at Bursa Malaysia Derivative Bhd: Date 7 November FCPO Prices (RM) ‘Open High Low | Settlement 1" Sept 2015 2028 2035 2025 2032 2" Sept 2015 2035 2050 2030 2040 3° Sept 2015 2035 2045 2020_ 2025 4" Sept 2015 2037 2045 2030 | 2040 5° Sept 2015 _ 2040 2055 | 2042 2050 i) Calculate the initial and maintenance margin for this position, (2 marks) ii) Prepare a marked-to-market report for the 5 trading days based on the prices above. (7 marks) il) Determine the profit or loss if En. Daniel close-out his position on the 4" day of trading, (2 marks) A trader is bullish on the spot and FCPO prices over the next three months. He believes he can profit from this view and decides to trade 10 contracts of December 2015 FCPO at RM2050. He has to pay RM4,500 per contract of initial margin. After ‘one month of holding the position, FCPO prices went up 6 percent across the board. i) Calculate the initial margin for this trade. (2 marks) ji) Calculate his profit or loss when he closed-out his position. (3 marks) (© Hak Cipta Universiti Teknologi MARA, CONFIDENTIALCONFIDENTIAL 3 BMIDEC 2015/FIN645/541/651/630 °) Arbitrageurs take opportunities on price anomalies. They are speculators who are motivated to make profit on the trading. With regard to palm oil futures (FCPO), describe ‘reverse cash and carry arbitrage’ and why it is not possible for FCPO. (4 marks) QUESTION 2 a) b) Abraham, a semi-pro arbitrageur observed that there is a significant mismatch between the stock market index and the FKLI. Today, early September, KLCI is currently quoting at 1557 while October FKLI at 1568. In view of this arbitrage ‘opportunity, he has a fund arrangement with his bank for RM10 million at 5.5 percent per annum and expected a dividend yield of 4 percent significantly for October prices. If at maturity, both prices converged at 1588; i) Briefly outline how Abraham would take advantage of this situation. (3 marks) ii) Establish the arbitrage activity by showing the arbitrage profit, if any. (12 marks) Describe these two (2) major trading offences under the Futures Industry Act (FIA) 1993, i) Manipulation and Cornering (2.5 marks) ii) Bucketing (2.5 marks) QUESTION 3 a) Hedgers are participants in the market to transfer price risk. For financial institutions holding bond portfolios, the price risk holding these bonds, will be transferred to the futures market. With the rise in interest rate expected to continue till end of this year, ANB Bank decides to trade in the 5-year MGS futures (FMG5) to protect its RM150 million bond portfolio. It is currently early October 2015, the RM150 million bond portfolio is priced at 113 and FMG5 December 2015 trades at 115. At the end of the year, interest rate actually rises, bond portfolio price falls to 110 and FMGS price falls to 112. i) Describe the strategy undertaken by ANB Bank (2 marks) (© Hak Cipta Universiti Teknologi MARA CONFIDENTIALCONFIDENTIAL, 4 BMIDEC 2015/FIN645/541/651/630 ii) Outline the hedging strategy and the resulting bond portfolio value with and without hedging. (12 marks) b) _ Discuss the significance of MGS futures in the long term debt market. (6 marks) QUESTION 4 a) Today is September 2015 and FKB3 at BMDB are trading as follows: Contract Price ‘September 2015 FKB3 92.02 December 2015 FKB3 92.18 ‘March 2016 FKB3 92.29 June 2016 FKB3 92.38 A trader believes the yield curve will normalize and wants to create a spread for December 2015 and March 2016 contracts, which later close at 92.31 and 92.18 respectively. i) Describe how the trader could create a profitable spread trade. (2marks) ii) Determine the spread profit or loss (assuming there are 10 lots) by ignoring commission charges. (10 marks) b) Briefly explain “physical delivery” in derivative trading. (4marks) c) Distinguish between European and American option contracts. (4 marks) QUESTION 5 @) The following are the quotations of Single Stock Option traded at BMDB: { Option Type Exercise Price Option price Call fauen 10/50! 0.20 Call 8.00 0.30 7 Put 10.50 7 0.35 Put 9.50 0.25 © Hak Cipta Universiti Teknologi MARA CONFIDENTIALCONFIDENTIAL 5 BM/DEC 2015/FIN645/541/651/630 Construct an expiry profit diagram for each of the following expectations on price movements using the relevant information from the table above. State the limited/unlimited profitfoss and the breakeven point(s): i) The prices are expected to move downward with limited downside. il) There will be a big jump in the stock market but unsure of the movement. ili) ‘The market is expected to be moderately bearish (14 marks) b) ‘Compared to futures, options are much more favored based on the two primary characteristics of options which are limited risk and flexibility. Explain these two features. (6 marks) END OF QUESTION PAPER (© Hak Cipta Universiti Teknolog! MARA CONFIDENTIAL