FINANCIAL DERIVATIVES
Module - 2
Problem 15
The market capitalization of weighted index contains only 5 stocks as shown below. The current value
of index is 16,500.
Company Share Price (Rs) Market Capitalization
(Crore, Rs)
Titan 2,135 1,90,000
Hindustan Unilever 2,530 6,08,000
L&T 1,653 2,36,000
Maruti 8,596 2,65,000
HDFC 2,172 7,58,000
HDFC is giving dividend of Rs.15 after 25 days and L & T is giving dividend of Rs. 22 after 32 days.
The risk free rate of interest is 10% p.a. (compounded continuously) and lot size of index is 25.
Calculate the price of future contract with expiration in 60 days on this index.
Problem 16
A two-month Nifty futures contract trades on the NSE. The cost of financing is 10% p.a and
the dividend yield on Nifty is 2% annualized. The spot value of Nifty 16,500. What is the fair
value of the Nifty futures contract?
HEDGING
Problem 17
On March 12, 2022 an Investor buys 2,000 shares of Infosys at the price of Rs.1,400 per
share. The portfolio value being Rs.28,00,000 (Rs.1,400 * 2000). The investor feels that the
market will fall and thus wants to hedge by using Infosys Futures (stock futures). The Infosys
futures (near month) trades at Rs.1,412. What happens on futures expiry day Infosys spot
price is (a) Rs.1,500 (b) Rs.1,200.
Problem 18
On March 13th 2012, an investor is holding 1000 shares of HUL which is trading at Rs.2,530
per share. The investor fears that the market will fall and he needs to hedge. The HUL April
futures are trading at Rs.2,600 per share and it trades in multiples of 500 shares. What
happens on the future expiry day if HUL spot price is (a) Rs.2,500 (b) Rs.2,650?
Problem 19
Sugar mill in Uttar Pradesh is expected to produce 100 MT of sugar in the month of April.
The price in the month of February is Rs.22 per kg. April futures contract in sugar, due on
20th April is trading at Rs.25 per kg. The sugar mill apprehends that the price less than Rs.25
per kg will prevail in April due to excessive supply. How can sugar mill hedge its position
against the anticipated decline in sugar prices in April?
What would be the payoff if spot price on execution day is (a) Rs.22 per kg (b) Rs.26 per kg
Assume each future contract is of 10MT.
Problem 20
Assume an investor holds a portfolio worth Rs.12,75,000 that almost tracks the NIFTY index,
currently NIFTY futures is quoting at 16,500 and investor intends to stay away from the
market since he expects the market to decline due to general elections by 5%. Investor can
avoid exposure during such period by selling the portfolio and re-enter the market after
elections. This activity would result in significant transaction cost both on sale and purchase
of the portfolio. Show how stock index futures contract can help him in keeping away from
the market during this period with minimum cost.
Problem 21
Assume an investor holds a portfolio worth Rs.17,75,000 that almost tracks the NIFTY index,
currently NIFTY futures is quoting at 16,500 and investor intends to stay away from the
market since he expects the market to decline by 8%. Show how stock index futures contract
can help him in keeping away from the market during this period with minimum cost.
Problem 22
Consider MF manager who anticipates receiving 100 crore in a month after the new fund
offer closes. But he believes that there is likelihood that the market will go up during this
period. The fund manager intends to invest in stocks that are of above average risk, beta –
1.5. NIFTY future index is trading at 16500.
How fund manager can manage risk by using NIFTY futures? What would be his payoff if
market goes up by 6%.
Problem 23
A fund manager’s analysis shows that cement stocks are undervalued. So he expects to profit
from it by increasing fund’s exposure to this sector. He desires to have protection in case
there is broad market wide decline.
Assume he plans to invest 3 crore and portfolio of cement has beta of [Link] index
futures show how the fund manager can manage risk.
Index future is trading at 16,500. Assume market drops by 4.8%.
Problem 24
On January 1, an investor has a portfolio of 8 shares as given here:
Security Price No. of Shares Beta
A 2900 400 0.59
B 3185 800 1.32
C 660 200 0.87
D 600 300 0.35
E 281 400 1.16
F 2750 750 1.24
G 515 300 1.05
H 1715 900 0.76
The cost of capital for the investor is 20% p.a. The investor fears a fall in the prices of the
shares in the near future. Accordingly he approaches you for advice. You are required to:
a. State the options available to the investor to protect his portfolio.
b. Calculate β of the portfolio.
c. Calculate theoretical value of the futures contract expiring in Feb and March.
d. Calculate the number of units of CNX Nifty that you would have to sell if he desires
to hedge until March 120% of the portfolio.
e. Determine the number of futures contracts the investor should trade if he desires to
reduce beta of his portfolio to 0.7.
Additional Information:
1. The current CNX Nifty value is 16,200.
2. CNX Nifty futures are traded in units of 50.
3. The February futures are currently quoted at 16,700 and March futures are quoted at
17,100.
Problem 25
On March 1, investor’s portfolio is as follows:
Security Price No. of Shares Beta
P 380 15,000 0.9
Q 670 10,000 0.8
R 2200 5,000 1.2
S 900 7,500 1.1
The money can borrowed at 10%p.a. compounded continuously. The investor fears a fall in
the prices of the shares in the near future. He approaches you for an advice. You are required
to:
a. Find out portfolio beta
b. Find out fair value of Nifty futures expiring at the end of March, April and May.
c. If the investor wants to hedge 110% of his portfolio till the end of April, what should
he do?
d. The investor wants to increase the beta to 1.4. how can he do it?
Presently Nifty is at 15,800 and March Nifty futures are trading at 15,900, April Nifty futures
trading at 15,995 and May Nifty futures are trading at 16,070.