A speculator is bearish on the underlying market price in the near future. Alicia has informed her broker to trade for RM 1 million in Kala Lumpur Composite Index (KLCI) futures contracts at a price of 978. Currently, the beta is half volatile as the market. Suppose that over the next five days, the futures price evolved as follows:

Day	Settlement Price
1	972
2	980
3	999
4	988
5	975

Required:

1. If Alicia is bearish on the market, what speculative strategy should she enter? Explain.

2. Calculate the contract value of the CPO futures contract. (Hint: to round off the contract number)

3. If the initial margin is 10% of contract value and the maintenance margin is 80%, prepare the marked-to-market.

4. Find the total profit or loss that the trader makes from such speculative trading if the commission charge is RM105 per contract.

5. Is there any margin call? If yes, by how much?

6. Calculate leverage investment for day 3.

7. Why do speculators prefer to speculate instead of other strategies?

Answer rating: 100% (QA)

1 Alicia should enter the strategy of buying low and selling high The market is expected to move dow... View the full answer