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    Tutorial Chapter 7

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    nur izzati
    The document discusses using futures contracts to hedge against the risk of rising bond prices. It proposes: 1) Buying long futures contracts in February at 114 to hedge the planned purchase of RM200 million in bonds in March. 2) Closing out the futures contracts in March when prices are expected to be 116, realizing a profit of RM4 million. 3) The effective hedged purchase price of the bonds is 113.72, lower than the expected March spot price of 116. The document shows how futures contracts can be used to hedge and lock in a purchase price lower than the expected future spot price.

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    Tutorial Chapter 7

    Uploaded by

    nur izzati
    214 views5 pages
    The document discusses using futures contracts to hedge against the risk of rising bond prices. It proposes: 1) Buying long futures contracts in February at 114 to hedge the planned purchase of RM200 million in bonds in March. 2) Closing out the futures contracts in March when prices are expected to be 116, realizing a profit of RM4 million. 3) The effective hedged purchase price of the bonds is 113.72, lower than the expected March spot price of 116. The document shows how futures contracts can be used to hedge and lock in a purchase price lower than the expected future spot price.

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    TUTORIAL CHAPTER 7

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    The document discusses using futures contracts to hedge against the risk of rising bond prices. It proposes: 1) Buying long futures contracts in February at 114 to hedge the planned purchase of RM200 million in bonds in March. 2) Closing out the futures contracts in March when prices are expected to be 116, realizing a profit of RM4 million. 3) The effective hedged purchase price of the bonds is 113.72, lower than the expected March spot price of 116. The document shows how futures contracts can be used to hedge and lock in a purchase price lower than the expected future spot price.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    214 views5 pages

    Tutorial Chapter 7

    Uploaded by

    nur izzati
    The document discusses using futures contracts to hedge against the risk of rising bond prices. It proposes: 1) Buying long futures contracts in February at 114 to hedge the planned purchase of RM200 million in bonds in March. 2) Closing out the futures contracts in March when prices are expected to be 116, realizing a profit of RM4 million. 3) The effective hedged purchase price of the bonds is 113.72, lower than the expected March spot price of 116. The document shows how futures contracts can be used to hedge and lock in a purchase price lower than the expected future spot price.

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    You are on page 1of 5

    Q4 JUNE 2014

    Item Information

    Trading objective To buy RM200 million 5-year MGS in March

    Interest rate expectation To fall (7%)

    Today February

    Later March

    Today spot price for MGS 114

    Today March FMG5 114

    Later spot price for MGS 116


    (in March)

    Later March FMG5 116


    (in March)

    Size of contract RM100,000 per contract

    Minimum price fluctuation RM10

    Number of futures contracts = Investment amount


    Size of contract
    = 200,000,000
    100,000
    = 2,000 lots of contract

    i) Hedging strategy using long hedge


    Cash market Futures Market
    Feb Plan to buy RM200 million Opening Contract
    (Today) of bond in March Buy 2,000 March FMG5
    (Current spot price = 114) contract at 114

    March Buy RM200 million of bond Closed Out Contract


    (Later) at expected higher price of Sell 2,000 March FMG5
    116 contract at 116

    Futures Profit/Loss = [(Selling Price-Buying Price) x no. of contracts x 100 x minimum


    price fluctuation] – brokers commission
    = [(116-114) x 2,000 x 100 x 10] – 0
    = RM4,000,000

    Change in = Spot price in future - Spot price today


    value Spot price today
    = 116-114 x 200,000,000
    114
    = RM 3,508,771.93

    Net effect = Total Portfolio + Change in Value + Futures Profit


    = -RM200,000,000 + (-RM 3,508,771.93 + RM4,000,000)
    = -RM 199,508,771.90

    ii) Effective price


    = ___Net Effect__ x Today spot price
    with hedging Portfolio Amount
    = RM 199,508,771.90 x 114
    RM 200,000,000.00
    = 113.72
     A portfolio manager who hedged would buy the bond at 113.72 as opposed to
    116.00

    Q3 JAN 2012
    Item Information

    Price expectation: Price to fall

    No of contract 8 contracts

    Contract size RM100,000 per contract

    Initial margin RM 8,000 per contract

    Maintenance margin RM 5,600 per contract (70%)

    Current futures contract price RM 121

    i) Contract value traded

    Date Market Calculation Contract Value


    Price
    ¿ Current futures price× 100 ×
    minimum price fluctuation

    1 118 118 x 100 x RM10 RM118,000

    2 116 116 x 100 x RM10 RM116,000

    3 123 123 x 100 x RM10 RM123,000

    4 112 112 x 100 x RM10 RM112,000

    5 110 110 x 100 x RM10 RM110,000


     Speculative Selling ( Sell high, Buy Low)

    ii) Total Initial Margin = Initial margin per contract x no. of contract traded
    = RM 8,000 x 8 contracts
    = RM 64,000

    Total maintenance margin = Maintenance margin per contract x no. of contract traded
    = RM 5,600 x 8 contracts
    = RM 44,800

    iii) Futures = (Selling Price – Buying Price) x no. of contracts x 100 x minimum
    Profit/Loss price fluctuation
    Day Calculation Profit/Loss in RM
    1 = (121 – 118) x 8 x 100 x 10 24,000
    2 = (118 – 116) x 8 x 100 x 10 16,000
    3 = (116 – 123) x 8 x 100 x 10 -56,000
    4 = (123 – 112) x 8 x 100 x 10 88,000
    5 = (112 – 110) x 8 x 100 x 10 16,000

    Day Settlement Profit / Initial Balance Maintenance Call Variable


    Price (RM) Loss Margin Margin Margin Margin Margin
    0 121 - 8,000 - 5,600 0 8,000
    1 118 24,000 - 32,000 5,600 0 32,000
    2 116 16,000 - 24,000 5,600 0 24,000
    3 123 -56,000 - -48,000 5,600 0 -56,000
    4 112 88,000 - 96,000 5,600 0 88,000
    5 110 16,000 - 24,000 5,600 0 16,000

    iv) No margin call because balance margin is higher than maintenance margin

    v) Profit/Loss = [(Selling Price – Buying Price) x no. of contracts x 100 x


    Contracts minimum fluctuation) – Broker’s commission
    = [(121 – 110) x 8 x 100 x 10) – 0
    = RM 88,000

    Profit/Los = (Sum of daily profit or loss) – Broker’s Commission


    s
    = (24,000+16,000+(-56,000)+88,000+16,000
    = RM 88,000

    Q3 APRIL 2011
    i) Bearish Spread Strategy. The benefit of a bearish spread strategy is that the net
    risk of the trade is reduced. Selling the put option with the lower strike price helps
    offset the cost of purchasing the put option with the higher strike price. Selling a
    stock short theoretically has unlimited risk if the stock moves higher.
    ii)
    Spread = Selling Price – Buying Price
    Sept MGS contracts Dec MGS contracts Spread

    (Today) Sell 6 September MGS @ Buy 6 December MGS @ 114.16 0.07bp


    114.23
    (Later) Buy June MGS@ 113.66 Sell September MGS@ 113.37 -0.29bp
    Total Basis Point -0.22bp

    iii) Futures = [(Selling Price – Buying Price) x no. of contracts x 100 x


    Profit/Loss minimum price fluctuation]-brokers commission

    Sept FMG = [(114.23 – 113.66) x 6 x 100 x 10] – 0


    = RM3,420

    Dec FMG = [(114.16 – 113.37) x 6 x 100 x 10] – 0


    = RM4,740

    Net Profit/Loss = Profit/ Loss Sept FMG +Profit/ Loss Dec FMG
    = RM3,420 + RM4,740
    = RM 8,160

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