Answer Happy

Question 1
You are the fund manager of an equity portfolio worth RM5,000,000
with an annualised standard deviation of changes in the value of
the portfolio being 30%. Due to RussianUkraine war, you are bearish
on the market and expect the war will take the market down by 5%.
You wish to hedge this position over a two-month horizon and the
FBMKLCI futures contract with three months to expiration is priced
at 1675 with a multiplier of RM50. The FBMKLCI futures has an
annual standard deviation of 20%. The correlation between the
portfolio and FBMKLCI futures annual changes is 0.8. The risk-free
rate is 4% pa and a dividend yield on the index is 2% pa.
Calculate the minimum-variance hedge ratio. How can you
advantageously use your bearish expectations to hedge your long
position in the stock market? Calculate the gain or loss on the
futures position if the futures price turns out to be 1586 at the
end of two months. Demonstrate how you accomplish your goal of
converting the equity portfolio to a risk-free position for a
period of two months.
With all working solution needed