FTSE Bursa Malaysia KLCI Futures (FKLI)

Table 1.1 Contract Specification

Contract Code
Underlying
Instrument
Contract Size
Minimum Price
Fluctuation
Daily Price
Limits

Contract
Months
Trading Hours
Final Trading
Day
Final
Settlement
Final
Settlement
Value
Speculative
Position Limit

FKLI
FTSE Bursa Malaysia Kuala Lumpur Composite Index (FBM KLCI)
FBM KLCI multiplied by RM50
0.5 index point valued at RM25
20% per trading session for the respective contract months except the
spot month contract.
There shall be no price limits for the spot month contract.
There will be no price limit for the second month contract for the final five
Business Days before expiration.
Spot month, the next month and the next two calendar quarterly months.
The calendar quarterly months are March, June, September and
December.
1. First trading session: Malaysian time 8:45 a.m. to 12:45 p.m.
2. Second trading session: Malaysian time 2:30 p.m. to 5:15 p.m.
The last Business Day of the contract month.
Cash Settlement based on the Final Settlement Value.
The Final Settlement Value shall be the average value, rounded to the
nearest 0.5 of an index point (values of 0.25 or 0.75 and above being
rounded upwards), taken at every 15 seconds or at such intervals as
may be determined by the Exchange from time to time from 3.45:30 p.m.
to 4.45:15 p.m. plus one value after 5.00pm of the FBM KLCI on the
Final Trading Day excepting the 3 highest and 3 lowest values.
Maximum number of net long or net short positions to be held: 10,000
contracts for all months combined
Source: Bursa Malaysia Berhad

Mechanics of trading
1. Number of Contracts (NOC)
= (Amount to Hedge x Percentage of Hedge x Beta) /(BP Futures x Size of Contract)
2. Establishment of Strategy
a. Anticipation of Rising Price
b. Anticipation of Falling Price
c. Portfolio Hedge
Table 1.2: Establishment of Long /or Short /or Portfolio Hedge Strategy
BMSB
Today

Closing Position

Later
3. Cash Market Position
Increase /or Decrease in Price
Where,
i.
EP
ii.
BP
iii.
Portfolio

BMDB
Opening Position

= [(EP BP) /BP] x Portfolio

= Ending Price
= Beginning Price
= Total Value of Portfolio

4. Futures Market Position

Profit /or (Loss) = (SP BP) x NOC x SOC
5. Net Effect
a. Net Effect = Futures Profit + Increase in Price
b. Net Effect = Futures Profit + (Decrease in Price)
6. Effective Buying Price (Only Applicable in Long Hedge Strategy)
a. Hedging
Effective Buying Price

= (Net Effect + Portfolio Size) /(NOC x SOC)

b. Naked
Effective Buying Price

= (Increase in Price + Portfolio Size) /(NOC x SOC)

7. Analysis
Table 1.3: Comparison Analysis Between Hedging and Naked
Hedging
Portfolio Value
Increase /or Decrease in Price
Net Portfolio Value
Effective Price (Long Hedge)

Naked

Why fund managers rarely hedge 100% of portfolio i.e. 85% hedge of overall
portfolio?
The reason for 85% hedge instead of fully hedge (100%) is to against potential market
declines, this is the reason why long /or short portfolio managers very rarely move above
100% hedge. This assures they are not caught naked with delta one exposure when
markets reverse. In essence, by varying net exposure over time as market conditions
change, portfolio managers are, in effect, acting as tactical asset allocators changing the
stock-to-cash ratio as they deem appropriate.
Beta
The rationale to have beta in portfolio is because it can help in assessing market risk and in
understanding the impact the market can have on the return expected from a share of stock.
In simple words, beta reveals how a security responds to market forces. Beta can be
positive or negative, though nearly all beta is positive. The table 1.3 below will illustrated the
impact of having beta in a portfolio.
Table 1.4: Beta
Beta

Direction

+1.00
Move in same
direction as the
market.
+0.50

-0.50

-1.00

Explanation

Change in
Market Return

Change in
Portfolio Return

Same response as
the market.

+10%
-10%

+10%
-10%

Only half as
responsive as the
market.

+10%
-10%

+5%
-5%

+10%
-10%

0%

Only half as
responsive as the
market.

+10%
-10%

-5%
+5%

Same response as
the market.

+10%
-10%

-10%
+10%

Unaffected by market movement.

Move in
opposite
direction as the
market.

QUESTION 1
As a Fund Manager of a leading unit trust company in Malaysia, you are managing a
portfolio worth RM100 million. You observe that the local stock market is still very vulnerable
to global economy uncertainties since early 2015.
Today, September 2016, the FBM KLCI cash index at the Bursa Malaysia Securities Berhad
is currently trading at 1,530 level and the futures contracts trade at 1,511, 1,522 and 1,500
for spot, November and December 2016, respectively in the Bursa Malaysia Derivatives
Berhad.
In anticipation of general falling stock market towards end of 2016, you decide to going short
in December 2016. Thus to protect your portfolio, you have decided to hedge 90% of the
exposure in the futures with a beta of 1.15.
Later in December 2016, both the underlying market and its futures contract are priced at
1,490.
On the basis of financial risk management, you are required to present to the Board on the
use of FTSE BM KLCI futures to protect your investment in the Bursa Malaysia Securities:
SOLUTION
1. Overview
Time Frame
Outlook
Strategy

December 2016
Bearish Market /or Falling Price Scenario
Short Hedge

2. Calculate the Number of Contracts to be Hedged

Number of Contracts
= (Amount to Hedge x Percentage of Hedge x Beta) /(BP Futures x Size of Contract)
= (RM100 million x 90% x 1.15) /(1,500 x 50)
= 1,380 Number of Contracts
3. Establishment of Short Hedge Strategy

Today

BMSB
Managing RM100 million portfolio
and to hedge RM90 million. Expect
price to drop.
Current Index: 1,530
Sell RM100 million portfolio at lower
price as expected.

Later

BMDB
Opening Position
Sell 1,380 December FKLI at 1,500

Closing Position
Buy 1,380 December FKLI at 1,490

Falling Index: 1,490

4. Cash Market Position

Decrease in Price

= [(EP BP) x Portfolio] /BP

= [(1,490 1,530) x RM100 million] /1,530
= (RM2,614,379.08)

5. Futures Market Position

Gain /or (Loss)

= (SP BP) x NOC x SOC

= (1,500 1,490) x 1,380 x RM50
= RM690,000

6. Net Effect
Net Effect

= Futures Profit + Selling Revenue

= RM690,000 + (RM2,614,379.08)
= (RM1,924,379.08)

7. Analysis
Portfolio Value
Decrease in Price
Net Portfolio Value

Hedging
RM100,000,000.00
(1,924,379.08)
98,075,620.92

Naked
RM100,000,000.00
(2,614,379.08)
97,385,620.92

By establishment of short hedge strategy, the drop in values of physical shares will be
reduced from (RM2,614,379.08) to (RM1,924,379.08) because of the profit made from
futures position. Futures profit of is RM690,000.00 used to cover the falling revenue from
selling shares. Without hedging, a company has no choice but to received less selling
revenue and hence, a mere victim of falling price.