QUESTION 2 (29 MARKS)

Elyana as a financial advisor in her company is responsible for derivatives market section. Robert Kwah is one of her biggest client and always refers to her reading his portfolio. Robert, is the CFO of Kwah Unit Trust Berhad and currently his company has about RM500 million.

Currently his company buy a call option of YY stock and short a call option of ZZ stock. The contract are for 2000 shares for each stock.

Currently, the market price for YY is RM20 per share while ZZ stock is RM35 per share. His company invests 25% each on these stocks. When Elyana enters the contract on b2ehalf of Kwah, the exercise price for YY is RM15 per share and RM22 per share for ZZ. The premium for each is RM1.20 per share and RM2 per share. After two months, YY prices increase by 5% while ZZ price decline by 7%.

Besides, Elyana plan to invest Kwah portfolio in KLCI futures. She expected bullish in the KLCI price and wants to enter between today (Mac) and May months. Currently, the KLCI price is 1440 points while KLCI May futures price is 1487 points. Upon maturity, both prices are increased by 20%. Elyana invests 2000 contract for Kwah.

1. Which one is the better option for Elyana when is in OTM? (Support with calculations).

(5 marks)

(CLO2:PLO2:C6)

2. What is the appropriate strategy for Elyana to enter in the futures market? What is her rationale to enter this strategy?