Reference no: EM133070777

Financial Risk Management

As a fund manager in X-cell Berhad, Alisa has to analyse and follow the current market situations. Malaysian government recently has made an announcement that the government will spending much on the public infrastructure. To boost the market, the government also will increase the budget in few sectors. The financial institution been advised to reduce the interest rate in order to increase the activities in the market.

Therefore, the government is planning to sell Malaysia Government Securities (MGS) for 5 years. The MGS futures price offered was very attractive and you will take this opportunity to growth your firm funds. To hedge in futures market, you have to contact one of the principal dealers that has been appointed by the Bank Negara Malaysia (BNM). Today, September 2020 the current interest rate is 7.8% and MGS futures price as in the third quarter of 2020 is 132.15. You plan to hedge RM30 million between the third quarter of 2020 and the first quarter of 2021.

In March 2021, the interest rate has drop from 7.3% in December 2020 to 6.8% in March 2021 further down to 6.2% in June 2021. While in March 2021, the MGS price is increasing by 0.18%.

Required:

A) What appropriate strategy should Alisa enter and will she get benefits from this strategy? Elaborate.

b) Proof your explanation in (a) by illustrate it in calculation.

c) If Alisa made a mistake on her expectation and the MGS futures has dropped to 132.35 and the interest rate unexpectedly rise to 8.4%, analyze for both changes in (c) and (d). Is she still achieve her price objective? Proof your explanation in (a) by illustrate it in calculation.