Arthur holds a well-diversified portfolio of high quality, large-cap stocks. The current value of Arthur's portfolio...

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Arthur holds a well-diversified portfolio of high quality, large-cap stocks. The current value of Arthur's portfolio is RM600,000 but he is concerned that the market is heading for a big fall over the next 3 months due to the trade war. He does not want to sell all his stocks because he feels they all have good long- term potential and should perform nicely once the economic condition is stabilized. As a result, he is thinking about using index options to hedge his portfolio. Assume that the FKLI currently stands at 1,650 and the details of the options available are as below: Option Contract Name Strike Price 3-month call option 1,690 3-month put option 1,620 Premium RM300 per contract RM500 per contract Advice Arthur on which types of option contract should be considered. Why? (3 marks) Calculate the number of option contract(s) should Arthur consider to fully hedge his RM600,000 stock portfolio against the fall of market. (Note: Value of index = index x RM50) (3 marks) Calculate the total premium Arthur has to pay based on the decision in part (1) if Arthur intends to fully hedge his RM600,000 stock portfolio against the fall of market. (2 marks) Arthur holds a well-diversified portfolio of high quality, large-cap stocks. The current value of Arthur's portfolio is RM600,000 but he is concerned that the market is heading for a big fall over the next 3 months due to the trade war. He does not want to sell all his stocks because he feels they all have good long- term potential and should perform nicely once the economic condition is stabilized. As a result, he is thinking about using index options to hedge his portfolio. Assume that the FKLI currently stands at 1,650 and the details of the options available are as below: Option Contract Name Strike Price 3-month call option 1,690 3-month put option 1,620 Premium RM300 per contract RM500 per contract Advice Arthur on which types of option contract should be considered. Why? (3 marks) Calculate the number of option contract(s) should Arthur consider to fully hedge his RM600,000 stock portfolio against the fall of market. (Note: Value of index = index x RM50) (3 marks) Calculate the total premium Arthur has to pay based on the decision in part (1) if Arthur intends to fully hedge his RM600,000 stock portfolio against the fall of market. (2 marks)

Answer rating: 100% (QA)

i Arthur should consider purchasing put options to hedge his portfolio against the potential fall in ... View the full answer