Arbitrage opportunities and pricing efficiency in Malaysia futures market - Kuala Lumpur stock exchange composite index futures (FKLI)

A futures contract is defined as the agreement between two parties, which are the seller and the buyer who agreed to purchase or sell a certain product. The contract states all the details of the transaction such as the agreed quantity, price and the delivery of the product on a predetermined date....

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Main Author:	Khong, Jason Jasmy
Format:	Thesis
Language:	English
Published:	2013
Subjects:	HB Economic Theory HF Commerce
Online Access:	http://ir.unimas.my/id/eprint/9293/1/Jason.pdf
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id	my-unimas-ir.9293
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spelling	my-unimas-ir.92932023-06-15T06:54:33Z Arbitrage opportunities and pricing efficiency in Malaysia futures market - Kuala Lumpur stock exchange composite index futures (FKLI) 2013 Khong, Jason Jasmy HB Economic Theory HF Commerce A futures contract is defined as the agreement between two parties, which are the seller and the buyer who agreed to purchase or sell a certain product. The contract states all the details of the transaction such as the agreed quantity, price and the delivery of the product on a predetermined date. Both parties have the responsibilities and obligations to carry out the agreed transaction at the maturity date. A futures contract is viewed as a hedging tool by the market players in order to minimize the risk exposure in cash market when there is adverse price change in the market. With the existence of stock indices futures contract, investors are now having a better control in managing their risk without changing their portfolio composition. In order to be a good hedging tool, hedging effectiveness is one the important criteria to measure the performance of the futures contract. It implies the accuracy of the futures contract to reflect its underlying market position. Therefore, pricing of the futures contract is very crucial because it will affect the hedging ability and performance of a future contract. Price convergence models indicates that price discrepancies between the cash market and future market should not last long. An effective arbitrage activity is vital to make sure. prices in both markets are moving in line. Arbitrageurs create a mechanism to ensure that. prices do not deviate substantially from its fair price for a long period of time. Therefore, if arbitrage is not effective, futures market will not be a good hedging tool for the investor. The general objective of this study is to identify the arbitrage opportunities and pricing efficiency for the Kuala Lumpur Stock Exchange Composite Index Futures (FKLI). The results show there are constant happenings of negative basis price deviations in the FKLI contracts under the simple cost of carry model. This confirms that there are many opportunities available for traders to undertake arbitrage activities. The results also suggest that the pricing mechanism is sensitive to the price volatility in the equity market. Moreover, there are still some violations of the arbitrage free boundary remained in observation after testing under different level of transaction costs which imply that the investor who is able to lower their transaction costs will have greater exploitation to the arbitrage opportunities than others. Universiti Malaysia Sarawak, (UNIMAS) 2013 Thesis http://ir.unimas.my/id/eprint/9293/ http://ir.unimas.my/id/eprint/9293/1/Jason.pdf text en validuser masters Universiti Malaysia Sarawak Faculty of Economics and Business.
institution	Universiti Malaysia Sarawak
collection	UNIMAS Institutional Repository
language	English
topic	HB Economic Theory HF Commerce
spellingShingle	HB Economic Theory HF Commerce Khong, Jason Jasmy Arbitrage opportunities and pricing efficiency in Malaysia futures market - Kuala Lumpur stock exchange composite index futures (FKLI)
description	A futures contract is defined as the agreement between two parties, which are the seller and the buyer who agreed to purchase or sell a certain product. The contract states all the details of the transaction such as the agreed quantity, price and the delivery of the product on a predetermined date. Both parties have the responsibilities and obligations to carry out the agreed transaction at the maturity date. A futures contract is viewed as a hedging tool by the market players in order to minimize the risk exposure in cash market when there is adverse price change in the market. With the existence of stock indices futures contract, investors are now having a better control in managing their risk without changing their portfolio composition. In order to be a good hedging tool, hedging effectiveness is one the important criteria to measure the performance of the futures contract. It implies the accuracy of the futures contract to reflect its underlying market position. Therefore, pricing of the futures contract is very crucial because it will affect the hedging ability and performance of a future contract. Price convergence models indicates that price discrepancies between the cash market and future market should not last long. An effective arbitrage activity is vital to make sure. prices in both markets are moving in line. Arbitrageurs create a mechanism to ensure that. prices do not deviate substantially from its fair price for a long period of time. Therefore, if arbitrage is not effective, futures market will not be a good hedging tool for the investor. The general objective of this study is to identify the arbitrage opportunities and pricing efficiency for the Kuala Lumpur Stock Exchange Composite Index Futures (FKLI). The results show there are constant happenings of negative basis price deviations in the FKLI contracts under the simple cost of carry model. This confirms that there are many opportunities available for traders to undertake arbitrage activities. The results also suggest that the pricing mechanism is sensitive to the price volatility in the equity market. Moreover, there are still some violations of the arbitrage free boundary remained in observation after testing under different level of transaction costs which imply that the investor who is able to lower their transaction costs will have greater exploitation to the arbitrage opportunities than others.
format	Thesis
qualification_level	Master's degree
author	Khong, Jason Jasmy
author_facet	Khong, Jason Jasmy
author_sort	Khong, Jason Jasmy
title	Arbitrage opportunities and pricing efficiency in Malaysia futures market - Kuala Lumpur stock exchange composite index futures (FKLI)
title_short	Arbitrage opportunities and pricing efficiency in Malaysia futures market - Kuala Lumpur stock exchange composite index futures (FKLI)
title_full	Arbitrage opportunities and pricing efficiency in Malaysia futures market - Kuala Lumpur stock exchange composite index futures (FKLI)
title_fullStr	Arbitrage opportunities and pricing efficiency in Malaysia futures market - Kuala Lumpur stock exchange composite index futures (FKLI)
title_full_unstemmed	Arbitrage opportunities and pricing efficiency in Malaysia futures market - Kuala Lumpur stock exchange composite index futures (FKLI)
title_sort	arbitrage opportunities and pricing efficiency in malaysia futures market - kuala lumpur stock exchange composite index futures (fkli)
granting_institution	Universiti Malaysia Sarawak
granting_department	Faculty of Economics and Business.
publishDate	2013
url	http://ir.unimas.my/id/eprint/9293/1/Jason.pdf
_version_	1783728042723508224

Arbitrage opportunities and pricing efficiency in Malaysia futures market - Kuala Lumpur stock exchange composite index futures (FKLI)

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