Question

You have been given RM100,000 capital in virtual futures account. You are required to trades (speculate and/or spread) in the futures market. You must trade actively, i.e. enter or exit the futures market at minimum of one trade per week. You are free to decide the number of trades and number of contracts per one transaction. The trading will be done via BURSAMKTPLC website. The futures products for trading are as follows:

1. FTSE Bursa Malaysia KLCI futures (FKLI)

2. Crude Palm Oil Futures (FCPO)

3. Gold Futures (FGLD)

You are also required to use the valid margin financing from investment bank. Thus you are required to determine your own investment bank and apply the margin requirements in your trading.

All your trading activities must be written in a report for submission at the end of semester to your lecturer. Your assignment marks are assessed in this report. The contents of the report as follow.

Report/Analysis:

1. Introduction (5 marks)
2. Background and contract specification of the three futures products. (15 marks)

Answer 1

Answer:

Introduction to futures:

Futures are derivative contracts (Financial contracts obligting the buyer to purchase an asset/stock/stock index/commodities (for the seller to sell an asset/stock/stock index/commodities at a predetermined future date and price.

Generlly the futures are settled in cash they acn be used either to speculate or hedge or arbitrage on the price movement of the underlying assets.

Depends upon the risk perception the users of the markets can use futures for HEDGING(risk control) or Speculating the assets

Generally users can take the short/long Futures and they are standard contract size.

1) FTSE Bursa Malaysia KLCI futures (FKLI)-INDEX FUTURES :

For example in our capital account RM100000 (malayasian Ringetts) is present we can Speculate on the FKLI index of september is as follows

On 10th september 2020 we agreed to buy one month future contract of 200 FKLI index points at 500 expiring on 25th september 2020 by depositing margin of RM 18520 and we estimate the index will be bullish due to decrease in COVID by september 22nd

On 25th september:

BUY @500/ FKLI

SELL@510/ FKLI

Profit per index RM10 and total contract size is 200 therefore total profit of RM2000 will settle BURSAMKTPLC by close the position of the margin

= 18520+10*200=20520 similarly if we expect the index will be bearish then speculate (take short position) ie.., SELL FKLI futures

SPREAD ON FUTURES:

A futures spread requires taking two positions simultaneously with different expiration dates to benefit from the price change.

On 10th september 2020 we agreed to buy one month future contract of 100 FKLI index points at 500 expiring on 25th september 2020 and agreed to sell 2 months future contract of 100 FKLI index points at 500 by depositing margin of RM 20520 and we estimate the index will be bullish due to decrease in COVID by september 22nd and we estimate on october futures to be bearish.

On 25th september:

BUY @500/ FKLI

SELL@498/ FKLI -(Counter position on maturity date)-RM 2 loss on each index point

ON 25th October

SELL@500/FKLI

Buy@490/FKLI-Counter position on maturity date

RM10 profit on each index

Net Profit of RM 8 per index and total contract size is 200 therefore total profit of RM1600 will settle BURSAMKTPLC by close the position of the margin

= 20520+8*200=222120 similarly if we expect the index will be bearish then speculate (take short position)

2) Crude Palm Oil Futures (FCPO)-COMMODITY FUTURES :

We can expalin the margin by using the crude oil futures

Three types are margin in the futures contract generally

a.Initial margin is amargin to be deposited at the inception of the contract.

b.Maintanence margin the margin at which account balance level at which we should deposit variation margin

c.Variation margin is the margin if the balnce in the trasind account falls below the maintainenece margin we deposit the Volatality margin it isdue to fall fluctuation and to avoid risk aganist the fluctuations.

For Example:

Suppose Mr.A has taken long crude oil futures of 10barrel(152 litres) of crude oil @ RM657.89/litre at initial margin of RM 800 per barrel and maintainence margin of RM 600 per barrel on 1stseptember 2020

intial margin=10*800=RM8000

Maintainence margin=10*600=RM6000

Suppose the crude oil prices is as follows of next for the weeks on the following dates and margin requirements:

(Amount in RM)

Date	BUY	SELL	Profit/Loss	Open bal	Deposit	Withdrawal	Closing bal
4th	657.89	658.89	152*10*1=1520	8000	-	-	9520
11th	658.89	661.89	152*10*3=4560	9520	-	3000	11080
18th	661.89	654.89	(152*10*7=10640)	11080	-	-	440
25th	654.89	655.89	152*10*1=1520	440	5560	1520	6000

here in the above table 4th sep RM8000 is intial margin and on 25thvRM 5560 is the volatality margin

3) Gold Futures (FGLD)-COMMODITY FUTURES:

Simailarly we can take the FGLD futures as follows with following RM100000 capital and we cn take arbitrage on the futures and hedge in the exposure of the customers or to speculate with the information.