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Question - Mr Ranjit, who is a trader trade with a share portfolio valued at RM1 million, thinks that the local stock market will nosedive in line with the overall bearish outlook on regional bourses. This is underpinned by the incessant surge of world oil and food prices which provide trading opportunities for those who simply wish to take a view on the direction of the local market.
Therefore, Mr Ranjit wishes to protect his investment against any unexpected fall in the share market. In June, the stock index futures trade at 1182.0. In the same month, he decides to hedge using September KLCI futures which are trading at 1194.0 Later in September, KLCI closed at 1159.0.
Required -
1. Why it is important for Mr Ranjit should do to protect his investment?
2. Outline an appropriate hedging strategy for Mr Ranjit.
3. Illustrate the outcome of the hedging strategy assuming Mr Ranjit closes out his position in early September at a price of 1163.0.
4. Comment the outcome of the hedging strategy proposed.
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