Futures are a contract between two parties for one party to purchase something from the other at a ulterior day of the month at a monetary value agreed upon today. A hereafters contract can be offset to adulthood by an equal and opposite dealing. ( Three month KLIBOR hereafters, 2010 )
Kuala Lumpur Inter-bank Offered Rate ( KLIBOR ) is an involvement rate derived that adoption and loaning financess in the inter-bank market ( 3 month KLIBOR hereafters, 2010 ) . Commercial and merchant Bankss, price reduction houses, finance companies and Cagamas command consisting for financess or offer to impart from or to each other in the inter-bank market through money agents ( 3 month KLIBOR hereafters, 2010 ) . The KLIBOR used by some Bankss as a benchmark for pricing loans to corporate organic structures ( 3 month KLIBOR hereafters, 2010 ) .
The three months KLIBOR hereafters contract is a fiscal hereafters contract based on the three months Kuala Lumpur inter-bank offered rate. ( Three month KLIBOR hereafters, 2010 ) The involvement rates pegged to the 3-month Kuala Lumpur Inter-Bank Offered Rate ( KLIBOR ) , which mean the KLIBOR rate, are changed every three months. Three month KLIBOR Futures contract are traded by Bursa Malaysia Derivatives BMD.
1.2 History of Three Month KLIBOR Futures contract
Three Month KLIBOR Futures contract was launched in May 1996. ( Highlight on Malaysian KLIBORA hereafters traded on Malaysia Derivatives Exchange, 2002 ) that supplying a necessary hedge and trading tool for the Malayan money market. ( Highlight on Malaysian KLIBORA hereafters traded on Malaysia Derivatives Exchange, 2002 ) Market participants use to extinguish hazards. ( Highlight on Malaysian KLIBORA hereafters traded on Malaysia Derivatives Exchange, 2002 ) RM1mil for one contract, with quarterly rhythm contract months of March, June, September and December that there will be an reverse relationship between the hereafters monetary value and involvement rates. ( Highlight on Malaysian KLIBORA hereafters traded on Malaysia Derivatives Exchange, 2002 ) If one thinks that short-run rates will lift tomorrow, one should sell the hereafters today. ( Highlight on Malaysian KLIBORA hereafters traded on Malaysia Derivatives Exchange, 2002 ) In Malaysia, these types of fiscal hereafters provide a quick, efficient and cost effectual agencies of obtaining exposure to the hard currency and debt markets that merchandising becomes more sophisticated, frequent and common topographic point. ( Highlight on Malaysian KLIBORA hereafters traded on Malaysia Derivatives Exchange, 2002 )
2.0 LITERATURE REVIEW
Harmonizing to Rendlemen and Carabini ( 1979 ) , they find that in the absence of dealing cost, the nearby hereafters contracts have been overpriced while longer-term hereafters contracts have been underpriced.
There are several surveies about the monetary value efficiency of 3-month KLIBOR hereafters contract. In pricing the hereafters contracts, they determine IFR by generalizing short-run rates via bootstrapping to find 6-month rates.
The bootstrapped rates are so used in finding the IFR and the theoretical hereafters monetary value. They find the nearby contracts to be overpriced while the distant 1s underpriced. The mispricing tended to worsen as the contract approached adulthood. ( Taufiq, 2006 )
Shamsher and Taufiq ( 2007 ) studied on the Asiatic derived function markets. The purpose of this research is to analyze the current position of selected trade good and fiscal derivative markets in Asia. The selected markets are included Indian, Korean, Hong Kong, China, Malaysia, and Japan and Singapore derived functions markets. Harmonizing to the research from Shamsher and Taufiq ( 2007 ) , there are 19 derivative markets in Asia. Its decision suggests that the liquidness commodities markets and active fiscal derivative markets are more developed by industrial or advanced economic systems. However, it is explain that the most of the 19 derivative markets or emerging markets still at an early phase in develop of the derivative markets.
Mubin and Mahmood ( n.d ) studied the carbon monoxide integrating and the term construction of Malayan involvement rates. The purpose of this survey is to analyze the involvement rates of term construction of different adulthoods. The monthly informations of Malayan Treasury Bills and Kuala Lumpur Interbank Offer Rates ( KLIBOR ) for short term money market involvement rates every bit good as Malayan Government Security for long term involvement rate were used. A sum of 98 observations are collected from Bank Negara Malaysia with the period from 1997 t0 2004. The co integrating trials and mistake rectification theoretical account ( ECM ) are applied in this survey.
The consequences support the outlooks hypothesis for involvement rates between short footings adulthoods. The outlooks hypothesis is the outputs of the different adulthood appear to travel together through clip. However, the hypothesis is rejected when short-end and long-end adulthoods are paired and analyzed. Besides, the output curve has limited foretelling power in finding involvement rates with long-end adulthoods.
Harmonizing to Bhattacharya and Fulghieri ( 1994 ) , a theoretical account of optimum interbank coordination through adoption and loaning when each of big Bankss faces clocking unsteadily in the return on its short-run or liquid investings. Since the extent of its ex ante investing in such liquid assets is assumed to be in private observed by each bank, it is consistent to presume that conditioning interbank contracts on such investing or their clip of accomplished return is non besides executable. Hence, the job of the interbank coordination with such private information is inherently a 2nd best one, which led to deformations in the form of pick over short term and long term investing at each bank. They found that if investing in liquid assets and their realized returns are information to the person ‘s Bankss the first best allotment is non incentive compatible and can qualify the 2nd best interbank solution.
Krehbiel and Adkins ( 2007 ) examine utmost day-to-day alterations in U.S. dollar LIBOR rates and using utmost value techniques to gauge hazard statistic. The information for this survey were obtained from the British Banker ‘s Association throughout the periods 1986 to 2005. The market hazard factors examined in this survey are one, three, six, nine and twelve month LIBOR rates. Daily alterations in these series are used to gauge parametric quantities of the Generalized Pareto distribution.
The likeliness of utmost day-to-day alterations in LIBOR rates are estimated utilizing the extremums over threshold method developed from utmost valuetheory. They find that the dress suits of the distribution of day-to-day simple alterations in LIBORs are non good approximated by the Generalized Pareto distribution and hence non conformable to utilize of utmost value analysis via the POT method. The chief effect of this is that the hazard statistics associated with a given alteration in the LIBOR depend on the initial rate degree that is at higher involvement rate.
Harmonizing to Kuwait Financial Centre S.A.K. “ Markaz ” R E S E A R C H, Malaysia, Korea and India as Asiatic state are more specialised in hereafters and index merchandise which are demutualized comparison to state such as Hong Kong and Singapore that has been to the full demutualized partially as opposed to foreign exchange. Besides, even through Malaysia, China, Indonesia, Thailand and Filipinas enjoy strong trading dealing in hard currency market, their derived functions market still really limited. in add-on, India and Malaysia have less than half of fanciful sum per trade in between Asia state and less than 1/3the fanciful sum per trade in US Contract size in developing state has been double up since 2003.
Derived functions merchandises are fundamentally develop to equilibrate or as a intervention for some fiscal job like hazard and volatilities yet derived functions are able to make fiscal job other than stabilise economic status such as crisis that occurred in twelvemonth 1990 through fudging activities or bad intent. ( Ayca Sarialioglu-Hayali, 2007 )
“ A hereafters contract is an understanding between a marketer and a purchaser that calls for the marketer to present to the purchaser a specified measure at a fixed clip in the hereafter, and at a monetary value agreed in the contract. ( Shamsher. M & A ; Taufiq.H. , 2000 ) . Stock index hereafters contract specify as the implicit in plus. ( Shamsher. M & A ; Taufiq.H. , 2000 ) . When the existent hereafters monetary value perverts from the just monetary value by more than minutess costs ( Shamsher. M & A ; Taufiq.H. , 2000 ) .The pricing efficiency of the hereafters contracts was determined by the standard mistake between the shutting existent and theoretical carnival values for each month FKL1 hereafters contract. ( Shamsher. M & A ; Taufiq.H. , 2000 ) . The existent hereafters monetary values do non meet towards theoretical monetary values with the transition of clip. ( Shamsher. M & A ; Taufiq.H. , 2000 ) . The just monetary value of a hereafters contract is determined by a pricing theoretical account ( Shamsher. M & A ; Taufiq.H. , 2000 ) . Real hereafters markets are non perfect and ever be chances to arbitrage the differences in the just and existent monetary values of hereafters contracts and in the procedure alining these monetary values ” ( Shamsher. M & A ; Taufiq.H. , 2000 ) .
“ The impact of index hereafters debut on underlying stock market volatility is good researched particularly in the instance of the US, UK, Japan and Hong Kong. ( Bacha, O.I. , Jalil O. and Othman, Khairudin, 1999 ) .Most of the surveies finds small or no grounds of increased stock market volatility following hereafters debut. ( Bacha, O.I. , Jalil O. and Othman, Khairudin, 1999 ) . Harmonizing to Pericli and Koutman examine S & A ; P 500 returns over the period 1953 to September 1994 finds no incremental consequence on underlying market volatility. As a consequence of the debut of index hereafters or of options to corroborate the findings of Santori who used daily and hebdomadal returns for S & A ; P 500 ( Bacha, O.I. , Jalil O. and Othman, Khairudin, 1999 ) .Miller and Galloway ( 1997 ) , examine the Mid Cap 400 index for grounds of volatility alteration following the debut of a hereafters contract on the index. They find no grounds of any increased volatility. Harmonizing to the Karakullukcu finds any expiration twenty-four hours impact on FTSE 100. ( Bacha, O.I. , Jalil O. and Othman, Khairudin, 1999 ) .This is because the FTSE hereafters contracts colony monetary values are calculated based on mid forenoon ( Bacha, O.I. , Jalil O. and Othman, Khairudin, 1999 ) .According to Bacha and Villa arrive at similar consequences for the Nikkei stock and hereafters contracts. ( Bacha, O.I. , Jalil O. and Othman, Khairudin, 1999 ) .They finds no grounds of an termination twenty-four hours consequence on the underlying Nikkei Index in Tokyo and these could be due to the staggered termination day of the months and different concluding colony monetary values. ” ( Bacha, O.I. , Jalil O. and Othman, Khairudi )
3.0 OPPORTUNITY & A ; ADVANTAGES
The most common usage of hereafters contracts is 3-month KLIBOR hereafters. Three month KLIBOR hereafters are besides known as FKB3. FKB3 is a derived functions contract that allows the marketer to present and the purchaser to have the KLIBOR at a hereafter day of the month. So, 3-month KLIBOR hereafters is besides categorizes as fiscal derived functions. KLIBOR offer participants many benefits which are listed below:
3-month KLIBOR hereafters is most actively traded compared to others fiscal derived functions. Harmonizing to Shahabudin ( 2006 ) , other successful international hereafters market such as Hong Kong Futures Exchange ( “ HKFE ” ) and Chicago Mercantile Exchange ( “ CME ” ) besides use three-month tenor involvement rate that is HIBOR and LIBOR, severally.
Good liquidness of the underlying hard currency market.
KLIBOR is most liquid hereafter contract in the interbank market if compared to other short-run money instrument. Harmonizing to Marina Abdul Razak and Obiyathulla Ismath Bacha ( 2009 ) , the 3-month KLIBOR hereafters contract has reasonably good though patchy liquidness.
3-month KLIBOR is positively correlated with other short-run instruments-certificates of Depostis ( CDs ) , bankers ‘ credences ( Bas ) , Treasury measures ( TBs ) , and redemption understandings ( repos ) . There month KLIBOR besides used as a benchmark for involvement charges on loans or pay involvement on sedimentations.
Provides a mechanism for fudging every bit good as re-allocating hazard to those more tolerant of it.
Harmonizing to Shahabudin ( 2006 ) , fudging is the act of reassigning hazard to the other party in position of alterations in involvement rates that will hold an inauspicious impact on the investing in the hard currency market. The participants such as the borrowers can used the KLIBOR hereafters contract to fudge the cost in the event of lifting involvement rate while when involvement rate falls, loaners can besides fudge to protect their gross. For illustration, a fund director expects to have an sum of money in three months ‘ clip. The fund director anticipates that the involvement rate to fall by the clip the money is invested. They will purchase the involvement rate hereafter contracts that will maturate at the clip the money is invested in hard currency market to protect the investing against the autumn in involvement rate.
Shahabudin ( 2006 ) besides stated that the director should purchase the hereafters contracts, as it is cheaper now and sell it subsequently at a higher monetary value because the monetary value of involvement rate hereafters contracts is reciprocally related to the involvement rates. Using this scheme will assist the fund director to bring forth net incomes from hereafters contracts dealing that will countervail the diminution in hard currency market investing due to involvement rate autumn.
Harmonizing to Shahabudin ( 2006 ) , the contract can besides be used to fudge the cost in the event of lifting involvement rate. If a corporate or fiscal establishment exchequer wants to borrow money in three months ‘ clip and anticipate that the involvement rate will increase by the clip the money is borrowed. At this clip, the financial officer can sell the involvement rate hereafters contracts that will maturate at the clip the money is borrowed in hard currency market to fudge against the involvement rate addition. Shahabudin ( 2006 ) besides stated that the exchequer should sell the hereafters contracts, as the monetary value is higher now and finish the dealing by purchasing it subsequently since the monetary value of involvement rate hereafters contracts is reciprocally related to the involvement rates.
Greater of nest eggs
In mortgage KLIBOR, it is the first conventional place loan pegged to KLIBOR, so the place purchasers can bask lower rates than mean market funding rates.
Fixed Quarterly Installment
KLIBOR is 3 -month footing, hence monthly refund is based on a quarterly fixed rate.
No Hidden Fees and charges
3 month KLIBOR have no set-up fees, care fees or processing charges.
High border of funding
KLIBOR enjoy financing border of up to 89 % as comparison to mean market funding rates.
Overall, KLIBOR is updated quarterly, most active index among the list above, it will travel both up or down but increasingly. KLIBOR is one of the most cardinal involvement bases for borrowing money.
4.0 Trading Method
KLIBOR hereafters contract is work otherwise from any other hereafters contract. This is because the adoption or loaning of KLIBOR hereafters contract are starts on the twenty-four hours the contract matures. For illustration, when the investors long a KLIBOR hereafters, it is represent that the investors are invests RM 1, 000, 000 for a period of three months which is get downing from the adulthood twenty-four hours of the contract at the hereafters yield rate.
However, when the investors short the KLIBOR hereafters, it represent the investors are borrows RM 1, 000, 000 for a period of three months which get downing from the adulthood twenty-four hours of the contract at the hereafters yield rate ( Shakirah, 2006 ) . Besides that, the three months KLIBOR besides used as a benchmark in pricing of money market instruments. For illustration, the money market instruments like Bankers Acceptance are used as benchmark in pricing.
The contract size for KLIBOR hereafters are RM 1, 000, 000 with a three month adulthood and quoted in the index footings which is 100.00 minus output on an one-year footing for a 360-day twelvemonth. It indicates that there has negative relationship between hereafters monetary value and involvement rates. For illustration, if the investors predict that the involvement rate will increase tomorrow, they must sell the hereafters contract today because the rise in involvement rate will do a bead in hereafters monetary value. Conversely, if the investors forecast the involvement rate will diminish, they will purchase the hereafters contract. This is because lessening in involvement rate will take to increase in hereafters monetary value.
The minimal monetary value fluctuation refers to the smallest monetary value which addition and lessening in the trading a given contract. The 1 tick or 0.01 % refers to the tick size in per centum which is tantamount to one footing point or one hundredth of one per centum or RM25. It means with the given contract size of RM1 million and three month tenor, each tick has a ringgit value of RM25 per contract ( RM 1,000,000 x 3/12 ten 0.01 % ) . The contract month for this three month KLIBOR hereafters are based on quarterly rhythm months which is March, June, September, and December up to 5 old ages in front and 2 consecutive months. The consecutive month contracts means that alternatively of the nearby contract being the closest quarterly month, contracts on the topographic point and undermentioned months are besides available. The aim of this consecutive month is attempted to hike the trading volume. The trading hr for the KLIBOR hereafters are divided into two trading Sessionss. The first trading session is from 9:00 am until 12.30 autopsies and the 2nd trading session is from 2.30 autopsy until 5.00 autopsies. The concluding trading twenty-four hours for KLIBOR hereafters contracts were expire on the 3rd Wednesday of the contract month.
Other than that, the KLIBOR hereafters contract is hard currency settled. It is no bringing of a hard currency instrument upon adulthood. This is because the Three Month Ringgit Interbank Deposit is non movable. Furthermore, there have three alternate methods to find the concluding colony value. It is of import because it will find the extent of a place ‘s addition or loss at adulthood.
Finally, Implied Forward Rate ( IFR ) technique is use to cipher the just value of the KLIBOR hereafters monetary value. To find the KLIBOR hereafters monetary value, this IFR technique are incorporates with the KLIBOR from different tenors. This is because the hereafters monetary value does non reflect the current KLIBOR but the rate is expected to predominate when the contract matures.
Below are the three months KLIBOR hereafters contract specifications.
Ringgit interbank clip sedimentation in the Kuala Lumpur Wholesale Money Market with a three month adulthood on a 360 twenty-four hours twelvemonth.
Quoted in index footings ( 100.00 subtractions output ) .
Minimal Price Fluctuation
0.01 % or 1 tick
Contract Calendar months
Quarterly rhythm months of March, June, September and December up to 5 old ages in front and 2 consecutive months.
Daily Price Limit
First trading session: Malayan 9:00 ante meridiem to 12:30 p.m.
Second trading session: Malayan 2:30 p.m. to 5:00 p.m.
Concluding Trading Day and Maturity Date
Trading ceases at 11:00 a.m. ( Malayan clip ) on the 3rd Wednesday of the bringing month or the 1 stBusiness Day instantly following the 3rd Wednesday of the bringing month if the 3rd Wednesday of the bringing month is non a Business Day.
Any contracts staying unfastened after the surcease of trading for a contract month shall be settled by the Clearing House at the hard currency colony index ( 100.00 minus the hard currency colony rate ) .
On the Last Trading Day, the Clearing House will obtain the KLIBOR 3-month rates from Reuters mention page “ KLIBOR ” . The hard currency colony rate is derived by acquiring quotation marks from 20 major participants in the KLIBOR interbank market. The 5 highest and 5 lowest quotation marks are so eliminated to get at the arithmetic mean, rounded off to two denary topographic points, and therefore the colony rate. On this twenty-four hours, Bank Negara Malaysia will guarantee that all the rates on the Reuters “ KLIBOR ” screen page are updated by 11.00 am.
Cash Settlement based on the Cash Settlement Value.
Final Settlement Value
Calculated as 100.00 minus the Three Month KLIBOR as published by Reuters Ltd. On mention page “ KLIBOR ” at 11:00 hours ( Malayan clip ) on the Concluding Trading Day.
In the event that the above computation ( I ) can non be made, the concluding colony value shall be calculated as 100.00 minus the Three Month KLIBOR as published by Dow Jones Telerate Ltd on page figure 46387 at 11:00 hours ( Malayan clip ) on the Concluding Trading Day.
In the event that the above computation ( I ) and ( two ) can non be made, the concluding colony value shall be calculated as 100.00 minus the Three Month KLIBOR as obtained from Bank Negara Malaysia at 11.00 hours ( Malayan clip ) on the Concluding Trading Day.
In the event that none of the above 3 computations can be made, the concluding colony value shall be determined by the Exchange.
Open place of 100 or more tonss in any one bringing month, at the stopping point of trading of each Business Day.
Bad Position Limits
5,000 contracts, net gross Open Position for all bringing months.
( Beginning: Bursa Malaysia )
5.0 Data Description
Datas get downing from twelvemonth 1997 until 2004 which the beginnings are obtaining from Bank Negara Malaysia and has been use in following trial that as sample with 98 observation as entire.
The undermentioned tabular array is demoing the different behavior between several involvements which included 3month Malaysia Treasury measure, 3 month Kuala Lumpur Interbank offered Rate.
5.1 Table I
5.2 Unit Root Test
Dickey Fuller Test -0.92892
Augmented Dickey Fuller Test ( ADF 1 ) -1.2313
Dickey Fuller Test -1.4330
Augmented Dickey Fuller Test ( ADF ) -1.9470
Null and Alternative Hypothesis
H0 = Unit root exist
H1 = H0 do non true
With important at 5 % , the void hypothesis is rejected where H0 = Unit root exist both series which mean both series are stationary series every bit good alternatively of non- stationary.