INTER MARKET SPREAD EQUITY INDEX FUTURES

QUESTION 2 JUN 2008

As a professional speculator, Joseph believes that changes in the world political

situation will cause the S&P 500 Index futures to become outperformed than the
Bursa Malaysia Composite Index futures. It is now June 1st; the December Bursa
Malaysia Composite Index Futures are trading at 925 while the S&P 500 Index
Futures are trading at 521 .00

(The multiplier for the S&P Index Futures contract is USD 500)

The exchange rate is USD/RM 3.8000

By December 1st, the indices have risen, the Bursa Malaysia Composite Index is
quoted at 995 and the S&P Index Futures are at 562 points.

Indicate the position he would create on June 1st and calculate the net profit/ loss
(in ringgit) from this spreading strategy.

(12 marks)

Step 1

Choose inter-market spread strategy

• Buy outperformed contract

• Sell underperformed contract

The question stated that S&PF is outperformed the FKLI, therefore spread
strategy is by buying the S&PF contract and selling the FKLI contract today.

Step 2

Calculate value for both contract

= current futures price x size of contract

S&PF FKLI
= USD521 x 500 =RM925 x 50
= USD260500 =RM46250

Step 3

Convert value both contract into 1 currency (depend on the question)

The question ask to calculate total profit in RM, therefore convert contract value of
S&PF into RM

=USD 260500 x 3.8000

=RM989900
Step 4

Calculate spread ratio

higher futures contract value

=
lower futures contract value

RM989900
=
RM46250
= 21 contracts

This means 1 S&PF contract is equal to 21 FKLI contracts

Step 5

Draw spread strategy table

S&PF FKLI
Today Open position Open position
Buy 1 S&PF contract @ 521 Sell 21 FKLI contract @ 925

At Close Position Close Position

Maturity Sell 1 S&PF contract @ 562 Buy 21 FKLI contract @ 995

Step 6

Calculate spread profit

S&PF FKLI
= (562-521) x 1 x 500 =(926-995) x 21 x 50
=USD 20500 =-RM 73500
Convert into RM
=USD 20500 x RM 3.8000
=RM77900

Total net profit = RM77900 – RM73500

= RM4400