Investing in Malaysian Stocks: Methods, Strategies, and Costs

Question 1

You are a remisier with Rakuzen Sdn Bhd. A customer who is very confident on the stocks of Malaysian listed firms would like to invest in the Malaysian stock market. The FBM KLCI is currently at 890 points. Break-even call and put options are valued at 9 points and 5 points. The customer is interested to invest an amount of RM 2 million. The transaction cost for Stock Index Futures (SIF) is RM60 per contract.

Required:

(a) Explain THREE methods the customer can invest in Malaysian stocks.

(b) Calculate the number of contracts needed, the cost of carrying out the trade and explain the different strategies used for the three methods.                   

Question 2

The 3 business conglomerates in Malaysia, Genting Group of Companies, Berjaya Group of Companies and Kuok Group of Companies have all applied for the licence to operate a 24-hour television network in the country. Based upon government policy, only 1 licence will be given. Getting the licence to operate a 24-hour TV network will definitely boost the revenue of these conglomerates drastically through advertising fees, etc. Assume Kuok Group of Companies is one of these potential conglomerates to receive the licence and they have stock options available. Explain a suitable option trading strategy for this conglomerate. Estimate the cost of the option(s), expiry and strike price as well as draw the payoff graph.                                    

Question 3

The price of an equity is RM5. Call and put options are available for this equity. The maturity of the options is at time Y. The stock price will change 3 times until maturity. The chance of the stock price going up is 70% while going down is 30%. The annualised risk-free rate between now and time Y is 5% and the equity risk is 15%.

Required:

(a) Draw a statistical diagramme showing the path of the stock prices and their terminal prices for call option worth RM10.00 maturing at time Y. Calculate the value of the call option based upon the Binomial Options Pricing Model (BOPM).                                                                                                

(b) If it is a put option with the same characteristics, what would be its value based upon BOPM ? Explain why the put option value is higher or smaller compared to the call option.