A Mutual Fund is holding the following assets in ₹ Crores: Investments in diversified equity shares 90.00 Cash and Bank Balances 10.00 100.00 The…

CA Final · Advanced Financial Management · MTP · May 2025
A Mutual Fund is holding the following assets in ₹ Crores: Investments in diversified equity shares 90.00 Cash and Bank Balances 10.00 100.00 The Beta of the equity shares portfolio is 1.1. The index future is selling at 4300 level. The Fund Manager apprehends that the index will fall at the most by 10%. How many index futures he should short for perfect hedging? One index future consists of 50 units. Substantiate your answer assuming the Fund Manager's apprehension will materialize.

Suggested Answer and Working Notes:

Number of index future to be sold by the Fund Manager is: = (Beta of portfolio × Value of portfolio) / (Index future price × Units per future) = (1.1 × 90,00,00,000) / (4,300 × 50) = 99,00,00,000 / 2,15,000 = 4,604.65 ≈ 4,605 Justification of the answer: Loss in the value of the portfolio if the index falls by 10% is ₹ (1.1 × 10%) × 90 Crore = 9.90 Crore. Gain by short covering of index future is: (0.1 × 4,300 × 50 × 4,605) / 1,00,00,000 = 9.90 Crore This justifies the answer. Further, cash is not a part of the portfolio.

Topics: Derivatives Analysis & Valuation

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