Question: You are a fund manager, managing a portfolio with current value of RM10 million. The Index is now at 800 points (KLCI). You feat that

You are a fund manager, managing a portfolio with current value of RM10 million. The Index is now at 800 points (KLCI). You feat that the market might be headed for short term volatility and wish to hedge for 3 months. You have the following information.

3-mth KLIBOR = 8.5% annualized

KLCI dividend yield = 2.0% per year

3-mth KLCI futures = 812.69

Your portfolio beta = 1.20

b) Outline the hedging strategy and proof that you are fully hedge even if the KLCI index falls by

20% over the 3-mth period.

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