Mr. S has a portfolio of 50lacs which he wants to invest in share market with rebalancing target after every 15 days to start with for a period of…

CA Final · Advanced Financial Management · RTP · November 2024
Mr. S has a portfolio of 50lacs which he wants to invest in share market with rebalancing target after every 15 days to start with for a period of one month from now. The present NIFTY is 17025. The minimum NIFTY within a month can at most be 15322.50. He wants to know as to how he should rebalance his portfolio under the following situations, according to the theory of Constant Proportion Portfolio Insurance Policy, using "2" as the multiplier: (a) Immediately to start with. (b) 15 days later-being the 1st day of rebalancing if NIFTY falls to 16321.89. (c) 15 days further from the above date if the NIFTY touches 17512.14. Note: 1. Assume that the value of his equity component will change in tandem with that of the NIFTY. 2. Round off calculations upto whole numbers.

Suggested Answer and Working Notes:

(a) Maximum decline in one month = (17025-15322.50) / 17025 × 100 = 10% (a) Immediately to start with Investment in equity = Multiplier x (Portfolio value – Floor value) = 2 (₹ 50,00,000 - 45,00,000) = 10,00,000 Mr. S may invest - 10,00,000 in equity and balance in risk free securities. (b) After 15 days Value of equity = 10,00,000 x 16321.89 / 17025 = 9,58,701 Value of risk free investment = 40,00,000 Total value of portfolio = 49,58,701 Investment in equity = Multiplier x (Portfolio value – Floor value) = 2 (₹ 49,58,701 - 45,00,000) = 9,17,402 Revised Portfolio: Equity = 9,17,402 Risk free Securities = 49,58,701 - 9,17,402 = 40,41,299 (3) After another 15 days Value of equity = 9,17,402 x 17512.14 / 16321.89 = 9,84,302 Value of risk free investment = 40,41,299 Total value of portfolio = 50,25,601 Investment in equity = Multiplier x (Portfolio value – Floor value) = 2 (₹ 50,25,601 - 45,00,000) = 10,51,202 Revised Portfolio: Equity = 10,51,202 Risk Free Securities = 50,25,601 - 10,51,202 = 39,74,399 Thus, Mr. S should off-load 66,900 of risk free securities and divert to Equity.

Topics: Derivatives Analysis & Valuation

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