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BM/APR 2010/FIN/541/651/630

UNIVERSITI TEKNOLOGI MARA


FINAL EXAMINATION

COURSE

MALAYSIAN DERIVATIVES/MALAYSIAN
FUTURES AND OPTIONS

COURSE CODE

FIN541/651/630

EXAMINATION

APRIL 2010

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.
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 4 printed pages
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BM/APR 2010/FIN541/651/630

QUESTION 1
a)

The presence of derivative market serves to provide two (2) basic economic
functions. Briefly explain the two (2) functions.
(3 marks)

b)

List the three (3) roles of the Securities Commission as prescribed by FIA 1993.
(3 marks)

c)

You are a financial controller for BMB Refinery Sdn. Bhd. You are very sure that
your company requires 10,000 MT of CPO as raw material in January 2010. Today,
early October 2009, physical CPO is trading at RM1660 per MT while November,
December, January and February 2010 CPO futures are trading at RM1700,
RM1730, RM1770 and RM1800, respectively.
In anticipation of rising prices, establish your hedging strategy by showing the
benefits as measured by its effective price. Assuming that in early January 2010,
futures price closed at RM1820 and RM1830 for January and February, respectively
and cash price of RM1760.
(14 marks)

QUESTION 2
a)

List and briefly discuss the three (3) components of the cost of carry of physical
commodity.
(3 marks)

b)

Briefly explain the importance of arbitrageurs in the derivatives market.


(3 marks)

c)

En. Ahmad is a professional trader in derivatives market. Through his experience, he


believes that KLCI and FKLI are mismatched significantly for November 2009 prices.
Today, early October, the quotation of KLCI is at 821.42 while November 2009 FKLI
at 875.60. In view of arbitrage opportunity may exist, En. Ahmad decides to make a
loan arrangement with his bank for RM3,000,000 at 7.5% per annum and expected
dividend yield of 5.3%. At maturity on the last day November, both prices converged
at 888. En. Ahmad needs your help to establish his arbitrage activity by showing him
an arbitrage profit, if any.
(14 marks)

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BM/APR 2010/FIN541/651/630

QUESTION 3
a)

You observe today (early October 2009), the quotations of 5-year MGS futures
traded at BMDB is as follows:
November: 115.79
December: 115.42
Determine the spread profit/loss for the six lots, given the following:
i)
ii)
iii)
iv)

You are bearish about MGS


You decide to closeout both contracts simultaneously in mid November 2009.
Commission charges of RM100 round-turn, and
The closing price are:
November: 116.56
December: 116.12
(10 marks)

b)

Explain the meaning of the terms 'contango' and backwardation' in the context of the
futures market.
(5 marks)

c)

Explain the difference between intra-commodity spread and inter-commodity spread.


(5 marks)

QUESTION 4
a)

Compare and contras 'physical delivery' and 'cash settlement'.


(3 marks)

b)

Discuss the relationship between the interest rate and price of bond. Provide as
numerical example.
(3 marks)

c)

Consider the following OKLI Options traded at BMDB:


Option Type
Call
Call
Put
Put

Exercise Price
740
760
740
760

Option Price
33
20
12
18

Upon maturity, KLCI closed at 800, determine your strategy and maximum profit/loss
for each of the following strategies:

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i)

BM/APR 2010/F1N541/651/630

Long Straddle
(5 marks)

ii)

Short Strangle
(5 marks)

iii)

Bull Call Spread


(4 marks)

QUESTION 5
a)

A speculator forms a strong opinion that the share market is about to enter a
downtrend and decides to speculate in stock index futures. For this reason, he sells 1
February FKLI at the current price of 1156 in the morning of November 7. The margin
for FKLI is RM8000 per contract.
i)

Show the variation losses or gains given the following closing prices:

November
November
November
November
November

7: 1156
8: 1177
9: 1142
10: 1124
11:1122
(12 marks)

ii)

If on November 11, the speculator decides to close out, what is his realized
profit?
(2 marks)

b)

What is meant by the term "basis" and why is it important for the hedgers to be aware
of basis?
(6 marks)

END OF QUESTION PAPER

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