5. You manage an equity portfolio worth RM15,000,000. The portfolio beta is 1.2. During the next...

    

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5. You manage an equity portfolio worth RM15,000,000. The portfolio beta is 1.2. During the next five months, you expect a correction in the market that will take the market down about 5%. The FBMKLCI futures contract with six months to expiration is priced at 1641 with a multiplier of RM50. The risk-free rate is 5% per annum. a. How can you advantageously use your bearish expectations to hedge your long position in the stock market? Based on the CAPM, calculate the expected return on your portfolio at the end of five months. What is the unhedged value of the portfolio? [15 marks] b. Calculate the gain or loss on the futures position if the futures price turns out to be 1526 at the end of five months. Calculate the expected value of the hedged position in five months. What is the percentage change in the hedged portfolio? How close did you come to the desired result? c. What factors prevent hedges from being a perfect hedge? Explain. [15 marks] [Word Limit: 200 words] [20 marks] 5. You manage an equity portfolio worth RM15,000,000. The portfolio beta is 1.2. During the next five months, you expect a correction in the market that will take the market down about 5%. The FBMKLCI futures contract with six months to expiration is priced at 1641 with a multiplier of RM50. The risk-free rate is 5% per annum. a. How can you advantageously use your bearish expectations to hedge your long position in the stock market? Based on the CAPM, calculate the expected return on your portfolio at the end of five months. What is the unhedged value of the portfolio? [15 marks] b. Calculate the gain or loss on the futures position if the futures price turns out to be 1526 at the end of five months. Calculate the expected value of the hedged position in five months. What is the percentage change in the hedged portfolio? How close did you come to the desired result? c. What factors prevent hedges from being a perfect hedge? Explain. [15 marks] [Word Limit: 200 words] [20 marks]