On 1 April 2015, Sunidhi was holding a portfolio of 10 securities whose value was - 9,94,450, the weighted average of beta of 9 securities of the…

CA Final · Advanced Financial Management · MTP · September 2025
On 1 April 2015, Sunidhi was holding a portfolio of 10 securities whose value was - 9,94,450, the weighted average of beta of 9 securities of the portfolio was 1.10.Since she was expecting a fall in the prices of the shares in near future to hedge her portfolio, she sold 5 contract of NIFTY Futures (Multiplier of 25) expiring in May 2015, which was trading at 8767.07 on 1 April. Required: Calculate the beta of the 10 th security.Reconcile the reasons in spite of 2% fall in the market as per Sunidhi's apprehension if she would have earned some profit on her cash position. A Futures contract is available on R Ltd. that pays an annual dividend of 4and whose stock is currently priced at 125. Each Futures contract calls for delivery of 1,000 shares to stock in one year, daily marking to market. The treasury bill rate is 8%. Required: Given the above information, assess the price of one Futures contract.If the company stock price decreases by 6%, then what will be the price of one Futures contract?Suppose the company stock price decreases, then evaluate realizes gain or loss for an investor that has a long position in one Futures contract of R Ltd. (Ignore margin and taxation, if any)

Suggested Answer and Working Notes:

(i) (1) To compute the beta of 10 th security first we shall compute overall weighted beta as follows: Let weighted β of the Portfolio is w, then, 5 = (994450 / (8767.07 × 25)) × W w = 1.102 approximately Let beta of 10 th security is β then, 1.102 = 0.90 x 1.10 + 0.10 x β β = 1.12 (2) The main reason for the profit in cash position might be due to reason that contrary to her expectation fall in the value of cash position there may be increase in value of cash position or decrease in the stock price may be lesser than 2%. (ii) (1) Future Price = Spot + Cost of Carry – Dividend = 125 + (125x 0.08) - 4 = 131 Price of one future contract = 1000 share x 131 = 1,31,000 (2) Price decrease by 6% Market Price = 125 x 94% = 117.50 Then, price of one future contract = 117.50 + (₹ 117.50 x 0.08) - 4 = 122.90 = 122.90 x 1000 = 1,22,900 (3) If the investor has taken a long position, decrease in price will result in loss for the investor. Amount of loss will be: 1,31,000 -1,22,900 = 8,100

Topics: Derivatives Analysis & Valuation

Open in Interactive Practice Hub · Full Practice Hub · Chapter Weightage · More in this subject

Related Questions in this Topic