Fatimah works for an established bank and is looking for an arbitrage opportunity between the stock...

 

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Fatimah works for an established bank and is looking for an arbitrage opportunity between the stock market and the FBM KLCI futures market. It is possible for her to find a stock portfolio of RM15 million at the prevailing 3-month KLIBOR rate of 5 percent per year. Today is July 2021 and the FBM KLCI is trading at 1815 with a dividend yield of 3 percent per year. The September 2021 FBM KLCI futures contract is trading at 1841 points and will expire in 92 days' time. i) iii) Prove quantitatively whether arbitrage opportunity exists to profit from the difference between cash and futures prices. (4 marks) Outline the strategy that Fatimah would engage in to take advantage of the situation. (4 marks) On the 30 of September, FBM KLCI and FBM KLCI futures contract both close at 1835. Complete Fatimah's outline and show the profit or loss of the arbitrage assuming that no dividends are paid during this time. (6 marks) Consider the quotations of OKLI below: Type Call ii) Call Put Put Exercise Price 600 650 600 650 Option Price 12 10 4 5 Based on the above quotations, you expect the following to take place in the underlying market. Establish your strategy for each case with graphical illustration and justification. i) You believe that there will be a big jump in the stock market but unsure of the movement. (3 marks) You are a conservative trader and expect prices to fall or at least a bit more likely to fall than rise. (3 marks) Fatimah works for an established bank and is looking for an arbitrage opportunity between the stock market and the FBM KLCI futures market. It is possible for her to find a stock portfolio of RM15 million at the prevailing 3-month KLIBOR rate of 5 percent per year. Today is July 2021 and the FBM KLCI is trading at 1815 with a dividend yield of 3 percent per year. The September 2021 FBM KLCI futures contract is trading at 1841 points and will expire in 92 days' time. i) iii) Prove quantitatively whether arbitrage opportunity exists to profit from the difference between cash and futures prices. (4 marks) Outline the strategy that Fatimah would engage in to take advantage of the situation. (4 marks) On the 30 of September, FBM KLCI and FBM KLCI futures contract both close at 1835. Complete Fatimah's outline and show the profit or loss of the arbitrage assuming that no dividends are paid during this time. (6 marks) Consider the quotations of OKLI below: Type Call ii) Call Put Put Exercise Price 600 650 600 650 Option Price 12 10 4 5 Based on the above quotations, you expect the following to take place in the underlying market. Establish your strategy for each case with graphical illustration and justification. i) You believe that there will be a big jump in the stock market but unsure of the movement. (3 marks) You are a conservative trader and expect prices to fall or at least a bit more likely to fall than rise. (3 marks)

Answer rating: 100% (QA)

1Given than the 3 month future is trading at 1841 so the theoricitical future price spot price inter... View the full answer