Derivatives instrument in the form of futures and options gives the fund manager and investor additional tools in structuring the risk and return characteristics of investment strategies particularly in equity or shares. The impact of using derivatives on an equity investment portfolio can be complicated. It is helpful to have a methodology to understand the payoff patterns from various combinations of derivatives. Such framework allows the fund manager and investor to see the effect of using derivatives as the price of the underlying security changes in order to evaluate the desirability of the investment strategy.

The fund manager or investor who owns multiple shares that is featured on a single index, and worries about a downturn of the share prices, can offset the risk of losses with an equity derivatives instrument such equity index futures and/or options. In Malaysia, the primary equity index futures are FTSE Bursa Malaysia Kuala Lumpur Composite Index Futures (FKLI) traded on a regulated exchange known as Bursa Malaysia Derivatives (BMD). The underlying index of FKLI is a capitalsation-weighted stock market index, composed of the 30 largest companies on the Bursa Malaysia by market capitalisation that meet the eligibility requirements of the FTSE Bursa Malaysia. 

Trading in FKLI allows the equity fund manager and investor to gain exposure to the FBM KLCI comprising the 30 largest companies listed on Bursa Malaysia’s Main Market with a single futures contract. The FKLI trading gives the ability to a trader to short sell the index futures contact prior to own the contract itself. For example, in the event of a bearish market outlook, the trader can sell a FKLI contract to initiate a short position and buy back later at a lower price to close out the position and vice versa

Using Derivatives To Manage Equity Portfolio - Recorded webinar

Speaker: Andy Tan

Webinar Date: 25/2/2021

Source: SIDC

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