CONFIDENTIAL BA/FEB 2023/FIN645/541
UNIVERSITI TEKNOLOGI MARA
FINAL EXAMINATION
COURSE FUTURES AND OPTIONS /
MALAYSIAN DERIVATIVES
COURSE CODE FIN645/541
EXAMINATION FEBRUARY 2023
TIME 3 HOURS
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 invigilator.
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 5 printed pages
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CONFIDENTIAL 2 BA/FEB 2023/FIN645/541
QUESTION 1
a) You notice the following market report of Crude Palm Oil Futures at Bursa Malaysia
Derivatives Bhd.
The Crude Palm Oil Futures (FCPO) Closing: Nov 2022
Open
Month Open High Low Settlement Volume
Position
Dec 22 4169 4174 4160 4168 581 3355
Jan 23 4166 4171 4156 4154 2762 6375
Feb 23 4166 4168 4150 4161 4140 6532
Mar 23 4161 4165 4149 4149 454 1675
Apr 23 4160 4163 4149 4145 53 116
May 23 4150 4155 4149 4140 15 65
Jun23 4150 4150 4149 4138 5 44
Jul 23 4150 4150 4149 4135 5 135
Sept 23 - - - - -
i) Using the contract months of March and June, explain how you would create a
spread position and identify the spread position taken if you expect that it is
narrowing between the months.
ii) Given that the number of contracts for each contract month is five (5) and the
commission charged is RM50 per contract, if you decide to close out your positions
on February 2023, calculate the realized profit or loss for the positions taken in (i) if
the futures prices for March and Julne are 4125 and 4130, respectively.
(14 marks)
b) Discuss briefly how an inter-market spread trader makes profit by entering into the futures
market.
(6 marks)
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CONFIDENTIAL 3 BA/FEB 2023/FIN645/541
QUESTION 2
a) As the Chief Financial Officer (CFO), you anticipate that your company will require short-
term funding for expansion purposes in March 2023. 30 million ringgit are required. The
3-month KLIBOR rate currently, in January 2023, is trading at 3.16 per annum.
FKB3 futures for January, February, and March of 2023 are trading at 96.85 percent per
annum, 96.82 percent per annum, and 96.80 percent per annum, respectively, at Bursa
Malaysia Derivatives Bhd.
Additionally, you will be charged 1.75 percent more than the KLIBOR rate.
Outline her arbitrage approach and explain the outcome of the strategy assuming that the
cash index hits 1480 and the futures price grows to 1490 points in 90 days in light of the
aforementioned information by demonstrating quantitatively that arbitrage is viable.
(15 marks)
b) Discuss the reasons why an arbitrage activity is possible to be executed for the KLIBOR
cash and futures market in both overpriced and underpriced futures contract situations.
(5 marks)
QUESTION 3
a) An experienced arbitrageur working for Damak Asset Management's Arbitrage Desk
attempts to obtain a stock portfolio worth RM50 million at the current 3-month KLIBOR
rate of 4.5 percent annually.
Based on her evaluation, she identifies a promising potential for arbitrage, and the
following information has been obtained to facilitate the implementation of her chosen
approach;
FTSE BM KLCI 1468points
FKLI 1485 points (maturing in 90 days)
Dividend yield 3.50 percent (annualized)
Outline her arbitrage plan and demonstrate the outcome of the approach given the information
above, demonstrating quantitatively that arbitrage is viable, provided that in 90 days, the futures
price rises to 1490 points while the cash index reaches 1480.
(14 marks)
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CONFIDENTIAL 4 BA/FEB 2023/FIN645/541
b) March 27, 2023, is Monday. You observe that the upcoming week does not include any
public holidays. Current price for the March 2023 FKLI is 1468. Five (5) contracts of the
FKLI for March 2023 will be purchased today.
i) Calculate your profit in the event that the contract's price is 1475 after five days
(loss),
ii) Determine the contract's maturity date,
iii) Determine your trading profit (loss) and explain your trading strategy and results if,
after 5 days, the price of this contract is 1459.
(6 marks)
QUESTION 4
a) You urge your broker to trade ten (10) contracts of FMG MGS5 today at 109.60 as you
are optimistic about the prospects for 5-year MGS as a result of the decline in market yield.
Suppose you have to pay RM5.000 for the initial margin on each transaction and keep 80
percent of it.
i) Determine your profit or loss if you close out your position on Day 5 and prepare
your marked-to-market position based on the upcoming closing prices;
Day
1 109.84
2 109.92
3 110.05
4 109.99
5 109.90
ii) Describe the leverage implications of your approach if you decide to close out your
position on Day 4.
(15 marks)
b) Currently, it is not feasible to engage in arbitrage for MGS Futures. Justify the
circumstances. Give a concise overview of the circumstances under which it is impossible
to engage in MGS futures arbitrage.
(5 marks)
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CONFIDENTIAL 5 BA/FEB 2023/FIN645/541
QUESTION 5
a) Consider that the following OKLI details are available at BMDB.
Type Strike Price Premium
Call 1525 25
Call 1550 15
Put 1525 20
Put 1555 25
Establish each of the synthetic strategies below by showing the payoff diagram with all
relevant labels.
i) Long straddle
ii) Short strangle
iii) Bull call spread
iv) Bear put spread
(14 marks)
b) Alisa had firmly convinced, as a semi-pro investor, that PNM shares have the ability to
increase in price steadily between today (early March 2023) and at maturity (May 2023).
Alisa has chosen to hedge, though, by purchasing ten (10) lots of PNM 11.00 call options
at RM1.10 each due to the unpredictability of the market.
The following are the PNM closing prices at BMB:
Day Closing Price (RM)
1 11.00
2 11.50
3 11.30
4 11.10
5 11.80
6 12.00
7 13.00
i) Name her strategy and show a payoff diagram with all relevant labels for the seven
(7) days of trading.
ii) If she decides to exercise her call option on Day 7, show how she can realize the
profit. Ignore transaction costs and assume that 1 lot equals to 1,000 units of
shares.
(6 marks)
END OF QUESTION PAPER
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