Mr. SK buys 5,000 shares of P Ltd. @50 per share whose beta value is 1.5 and sells 2,500 shares of Q Ltd. @80 per share having a beta value of 2. He…

CA Final · Advanced Financial Management · PYQS · September 2025
Mr. SK buys 5,000 shares of P Ltd. @50 per share whose beta value is 1.5 and sells 2,500 shares of Q Ltd. @80 per share having a beta value of 2. He obtains a complete hedge by Nifty Futures at 1,000 each. He closes out his position at the closing price of the next day when the share of P Ltd. has fallen by 2%, share of Q Ltd. appreciated by 5% and Nifty Futures has dropped by 2.50%. You are required to compute the overall profit or loss to Mr. SK from these set of transactions.

Suggested Answer and Working Notes:

No. of the Future Contract to be obtained to get a complete hedge = (5000 × 50 × 1.50 - 2500 × 80 × 2) / 1000 = (3,75,000 - 4,00,000) / 1,000 = -25 contracts or 25 contracts Thus, by purchasing 25 Nifty Futures contracts Mr. SK can obtain a complete hedge. Cash Outlay = 5000 x 50 – 2500 x 80 + 25 x 1,000 = 2,50,000 - 2,00,000 +25,000 = 75,000 Cash Inflow at Close Out = 5000 x 50 x 0.98 – 2500 x 80 x 1.05 + 25 x 1,000 x 0.975 = 2,45,000 - 2,10,000 +24,375 = 59,375 Gain/Loss = 59,375 - 75,000 = -15,625 (Loss)

Topics: Derivatives Analysis & Valuation

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