Mr. Paulo Rodriguez, a fund manager of The Blackstone Group Inc. holds a portfolio with a...

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Mr. Paulo Rodriguez, a fund manager of The Blackstone Group Inc. holds a portfolio with a current value of RM7.83 million. The cash index currently stands at 1,075 points. He fears that the market might be hedging for short term volatility and wishes to hedge for three months. The following information is available: 3-month KLCI futures Portfolio Beta 3-month KLIBOR Annual Dividend Yield of KLCI 1,125 points 1.45 8.25% 6.25% Outline the appropriate hedging strategy and prove that Mr Paulo Rodriguez is fully protected even if the index falls by 15 percent over the three-month period in cash and futures markets. Mr. Paulo Rodriguez, a fund manager of The Blackstone Group Inc. holds a portfolio with a current value of RM7.83 million. The cash index currently stands at 1,075 points. He fears that the market might be hedging for short term volatility and wishes to hedge for three months. The following information is available: 3-month KLCI futures Portfolio Beta 3-month KLIBOR Annual Dividend Yield of KLCI 1,125 points 1.45 8.25% 6.25% Outline the appropriate hedging strategy and prove that Mr Paulo Rodriguez is fully protected even if the index falls by 15 percent over the three-month period in cash and futures markets.

Answer rating: 100% (QA)

The appropriate hedging strategy for Mr Paulo Rodriguez would be to short sell 3month KLCI futures c... View the full answer