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.