Finance Acharya Jatin Nagpal 9A.

1 Krivii Eduspace

Ch 9A – Futures
SSS Model for Ques Solutions → "Simplified, Short & Standard" Solutions
Simplified Solutions - Easy to understand (No more anxiety due to complex solutions)
Short Solutions - Ques are solved in the shortest possible manner (Finish exam in time :D)
Standard Solutions - Ques are solved in a consistent manner (no more confusing treatments)

Index - Main Questions Ques Number

Basics of futures 1–2
Mark to Margin 3–4
Hedging using futures 5–9
Beta Management using Rf securities 10
Arbitrage using Futures 11 – 12
Hedge ratio 13
Discrete or Special Ques 14 – 15
Short Selling 16 – 17

Index - Additional Questions Ques Number

Basic practice ques 1
Hedging using futures 2–3
Low Probability – Unique Questions
- Reverse cal. No. of futures traded & Beta of stock from P&L figure 4
- Calculating Implied RF from Arbitrage profit 5
- Calculation of Open interest 6
Simplified AFM Ques Bank 9A.2 Derivatives (Futures)

Main Questions
Basics of futures

# Ques 1 – Rice trader {M19 Exam (New), N20 MTP 1 (Old), M23 Exam}
A rice trader has planned to sell 22,000 kg of Rice after 3 months from now. The spot price of the
Rice is ₹60 per kg. and 3 months future on the same is trading at ₹59 per Kg. Size of the contract
is 1000 Kg. The price is expected to fall as low as ₹56 per Kg., 3 months hence. What the trader can
do to mitigate its risk of reduced profit? If he decides to make use of future market, what would
be the effective realized price for its sale when after 3 months, spot price is ₹57 per Kg. and future
contract price for 3 months is ₹58 per Kg.?
Ans: The trader can short futures contract today at ₹59/kg.
• No. of contracts to be sold = 22000 = 22 contracts
1000

(b) After 3 months

• Gain on futures: (59 – 58) x 1000 x 22 = 22000
• Sell 22000 kg rice at spot price: 22000 x 57 = 1254000
Net amount realised = 1276000

• Net realisation per kg = 1276000 = ₹58/kg

22000

Using Average dividend yield to calculate Futures price

# Ques 2 – Mrinal {SM TYK}
On 31-8-2011, the value of stock index was ₹ 2,200. The risk-free rate of return has been 8% p.a.
The dividend yield on this Stock Index is as under:
Month Dividend paid p.a. Month Dividend paid p.a.
Jan 3% Jul 3%
Feb 4% Aug 4%
Mar 3% Sep 3%
Apr 3% Oct 3%
Finance Acharya Jatin Nagpal 9A.3 Krivii Eduspace
May 4% Nov 4%
Jun 3% Dec 3%

The interest is continuously compounded daily. Mr Mrinal wants to find out the future price of contract
deliverable on 31-12-2011. Given: e0.01583 = 1.01593.
Ans: Period of future contract = 31-08-2011 to 31-12-2011. That is → contract period = 4 months
• Average dividend yield during this period = {3% + 3% + 4% + 3%} = 3.25%
4

(rf – y)t
• Fair future price (FFP) = SR e = 2200.e(0.08-0.0325) x 4/12 = 2235.05

Mark to Margin

# Ques 3 – Pillai {SM TYK, N18 RTP (Old), N19 RTP (New), N24 MTP 2}
Sensex futures are traded at a multiple of 50. Consider following quotation of Sensex futures in
the 10 trading days during February, 2009:
Day High Low Closing
4-2-09 3306.4 3290.00 3296.50
5-2-09 3298.00 3262.50 3294.40
6-2-09 3256.20 3227.00 3230.40
7-2-09 3233.00 3201.50 3212.30
10-2-09 3281.50 3256.00 3267.50
11-2-09 3283.50 3260.00 3263.80
12-2-09 3315.00 3286.30 3292.00
14-2-09 3315.00 3257.10 3309.30
17-2-09 3278.00 3249.50 3257.80
18-2-09 3118.00 3091.40 3102.60
Mr. Pillai bought /purchased one Sensex futures contract on Feb 04 at closing rate. The average
daily absolute change in the value of contract is ₹10,000 and SD of these changes is ₹2,000.

Maintenance margin is 75% of initial margin. You are required to determine the daily balances in
margin account and payment on margin calls, if any taking closing Balance figure. Initial margin
should by calculated by using Daily Absolute Changes + 3 x SD
Ans: Initial margin = μ + 3.sd = 10,000 + 3 x 2000 = 16,000
Simplified AFM Ques Bank 9A.4 Derivatives (Futures)
Maintenance margin = 16,000 x 75% = 12,000

# Margin calculation of Abhishek (long at 3296.50)

Day Op. Bal. MTM (i.e. change in value) Call Amount Closing Bal.
5-2 16000 (3294.40 – 3296.50) x 50 = -105 - 15895
6-2 15895 (3230.40 - 3294.40) x 50 = -3200 - 12695
7-2 12695 (3212.30 – 3230.40) x 50 = -905 4210 16000
10-2 16000 (3267.50 – 3212.30) x 50 = 2760 - 18760
11-2 18760 (3263.80 – 3267.50) x 50 = -185 - 18575
12-2 18575 (3292.00 – 3263.80) x 50 = 1410 - 19985
14-2 19985 (3309.30 – 3292.00) x 50 = 865 - 20850
17-2 20850 (3257.80 – 3309.30) x 50 = -2575 - 18275
18-2 18275 (3102.60 – 3257.80) x 50 = -7760 5485 16000

# Ques 4 – Shiva {Dec 21 Exam (New), M23 MTP 1}

The contract price of December Nifty futures contract on a particular-day was ₹1310. The minimum
trading lot on Nifty futures is 100. The initial margin is 8% and the maintenance margin is 6%.
The index closed at the following levels on the next five days.
Day 1 2 3 4 5
Closing Price 1340 1360 1300 1280 1305
1. Mr. Shiva has gone long on the Nifty futures at 1310. Calculate the mark to market cash flows and
daily closing balances in his a/c. Also calculate the mark to market cash flows of the investor who
has gone short at 1310.
2. Calculate the net profit or loss on each of the contracts.
Ans: Lot value = 1310 x 100 = 1,31,000
Initial margin = 1,31,000 x 8% = 10480
Maintenance margin = 1,31,000 x 6% = 7860

i) Long investor
Day Opening Bal. Mark to market Margin call Closing Bal.
1 10480 3000 - 13480
2 13480 2000 - 15480
3 15480 -6000 - 9480
4 9480 -2000 3000 10480
5 10480 2500 - 12980
Finance Acharya Jatin Nagpal 9A.5 Krivii Eduspace

ii) Short investor

Day Opening Bal. Mark to market Margin call Closing Bal.
1 10480 -3000 3000 10480
2 10480 -2000 - 8480
3 8480 6000 - 14480
4 14480 2000 - 16480
5 16480 -2500 - 13980

2. Calculation of Profit / (loss)

# Long
Buy futures: 1310 x 100 = (1,31,000)
Sold futures: 1305 x 100 = 1,30,500
Loss: = (500)
# Short
Sold futures: 1310 x 100 = 1,31,000
Buy futures: 1305 x 100 = (1,30,500)
Profit: = 500

Hedging using futures

Hedging using Index futures

# Ques 5 – Matangi {SM TYK}
Matangi Mutual Fund is holding the following assets in ₹ Crores :
Investments in diversified equity shares 90
Cash and Bank Balances 10
100

• 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 that the Fund Manager's apprehension will materialize.
Ans: Number of Index futures to be traded = Vh x (TB – CB)
IFP x Lot size
Simplified AFM Ques Bank 9A.6 Derivatives (Futures)
where, Vh = Value to be hedged TB = Target beta
CB = Current beta IFP = Index futures price

• Number of index futures = 90 crores x (0 – 1.1) = -4604.65 or short 4605 contracts.

4300 x 50

• Justification – If market fell by 10% ₹ in crores

Fall in equity value: 90 crores x 1.1 = -9.9
Profit on futures: (4300 x 10%) x 50 x 4605 = +9.90075
Net Profit /loss: Nil (approx.)

Hence, shorting futures has lead to perfect hedging.

Hedging a portfolio of Cash + Equity

# Ques 6 – Parvati
Details of portfolio of Mrs. Parvati is given below:
Equity ₹8,00,000; Cash and Cash Equivalent ₹2,00,000: Beta of equity portfolio = 0.69. Current NSE
index future value is 930 with multiple of 200. If Mr. X wants to achieve an overall portfolio beta of
1.10 then how many numbers of futures contract he should so long?
Ans: Portfolio beta = {0.69 x 0.8} + 0 = 0.552

• Number of Index futures to be traded = Vh x (TB – CB)

IFP x Lot size

where, Vh = Value to be hedged TB = Target beta

CB = Current beta IFP = Index futures price

Number of index futures = 10 Lakhs x (1.1 – 0.552) = 2.946 or Long 3 contracts

930 x 200

Hedging portfolio consisting of Long & Short positions

# Ques 7 – Yayati {SM TYK}
Which position on the index future gives Mr. Yayati, a speculator, a complete hedge against the
following transactions:
(i) The share of Right Limited is going to rise. He has a long position on the cash market of ₹50 lakhs
Finance Acharya Jatin Nagpal 9A.7 Krivii Eduspace
on the Right Limited. The beta of the Right Limited is 1.25.
(ii) The share of Wrong Limited is going to depreciate. He has a short position on the cash market of
₹25 lakhs on the Wrong Limited. The beta of the Wrong Limited is 0.90.
(iii) The share of Fair Limited is going to stagnant. He has a short position on the cash market of ₹20
lakhs of the Fair Limited. The beta of the Fair Limited is 0.75.
Ans: Number of Nifty futures to hedge portfolio
Shares value Beta Position Nifty hedge
Right Ltd. 50 lacs 1.25 Long 62.5L Short
Wrong Ltd. 25 lacs 0.90 Short 22.5L Long
Fair Ltd. 20 lacs 0.75 Short 15L Long
25L Short

-> Speculator should short 25 lacs of Nifty futures to obtain a complete hedge.

Hedging portfolio consisting of Long & Short positions

# Ques 8 – Tara {SM TYK, N18 RTP (New), N22 RTP}
Tara buys 10,000 shares of X Ltd. at a price at ₹22 per share whose beta value is 1.5 and sell
5,000 shares at A Ltd, at a price of ₹40 per share having a beta value of 2. She obtains a hedge by
Nifty futures at ₹1,000 each. She closes out her position at the closing price of the next day when
the share of X Ltd dropped by 2%, share of A Ltd appreciated by 3% and Nifty futures dropped by
1.5%. What is the overall profit / loss of Tara?
Ans: Shares Value Beta Position Nifty hedge
X ltd 10,000 x 22 = 2.2L 1.5 Long 3.3L short
A ltd 40 x 5,000 = 2L 2 Short 4L long
Net position: 70,000 long

» Number of contracts required to hedge portfolio = 70,000/1000 = 70 contracts.

# Calculation of profit / (loss)

Loss on X ltd: 2.2L x 2% = 4,400
Loss on A ltd: 2L x 3% = 6,000
Loss on Nifty: 70,000 x 1.5% = 1,050
Total loss: 11,450
Simplified AFM Ques Bank 9A.8 Derivatives (Futures)
Partial hedging using futures
# Ques 9 – Shukracharya {SM TYK, M19 Exam (Old), N20 RTP (New), N23 MTP 2, N23 Exam}
On April 1, 2015, Shukracharya has a portfolio consisting of eight securities as shown below:

Security Market price No. of Shares Value

A 29.40 400 0.59
B 318.70 800 1.32
C 660.20 150 0.87
D 5.20 300 0.35
E 281.90 400 1.16
F 275.40 750 1.24
G 514.60 300 1.05
H 170.50 900 0.76

The cost of capital for the investor is 20% p.a. continuously compounded. The investor fears a fall
in the prices of the shares in the near future. Accordingly, he approaches you for the advice to
protect the interest of his portfolio.

You can make use of the following information :

(1) The current Nifty value is ₹8500.
(2) NIFTY futures can be traded in units of 25 only.
(3) Futures for May are currently quoted at 8700 and Futures for June are being quoted at 8850

You are required to calculate :

(i) The beta of portfolio.
(ii) The theoretical value of the futures contract for contracts expiring in May and June.
Given e0.03 = 1.03045, e0.04 = 1.04081, e0.05 = 1.05127.
(iii) Number of NIFTY contracts that he would have to sell if he desires to hedge until June in each of
the following cases:
(A) His total portfolio (B) 50% of his portfolio (C) 120% of his portfolio
Ans: Market No. of
Security Price Shares Value β Value x β
A 29.40 400 11,760 0.59 6,938.40
B 318.70 800 2,54,960 1.32 3,36,547.20
C 660.20 150 99,030 0.87 86,156.10
Finance Acharya Jatin Nagpal 9A.9 Krivii Eduspace
D 5.20 300 1,560 0.35 546
E 281.90 400 1,12,760 1.16 1,30,801.60
F 275.40 750 2,06,550 1.24 2,56,122.00
G 514.60 300 1,54,380 1.05 1,62,099.00
H 170.50 900 1,53,450 0.76 1,16,622.00
9,94,450 10,95,832.3

• Portfolio Beta = 10,95,832.30 = 1.102

9,94,450

(ii) May future price (F) = Sert = 8500 e0.20x2/12 = 8788

June future price (F) = Sert = 8500 e0.20x3/12 = 8935.80

(iii) Number of Index futures to be traded = Vh x (TB – CB)

IFP x Lot size
where, Vh = Value to be hedged TB = Target beta
CB = Current beta IFP = Index futures price

(A) Obtain complete hedge

= 994450 x (0 – 1.102) = -4.953 or -5 contracts i.e. short 5 contracts
8850 x 25

(B) Hedge only 50% of his portfolio

= 994450 x 50% x (0 – 1.102) = -2.47 or -3 contracts i.e. short 3 contracts.
8850 x 25

(B) Hedge only 120% of his portfolio

= 994450 x 120% x (0 – 1.102) = -5.94 or -6 contracts i.e. short 6 contracts.
8850 x 25

Beta Management using Rf securities

# Ques 10 – Jaimini {SM TYK, Dec 21 RTP (Old), N22 Exam, M23 MTP 2}
Detail about portfolio of shares of Jaimini is as below:
Simplified AFM Ques Bank 9A.10 Derivatives (Futures)
Shares No. of shares Price per share Beta
A Ltd. 3.0 lacs ₹500 1.40
B Ltd. 4.0 lacs ₹750 1.20
C Ltd. 2.0 lacs ₹250 1.60
The investor think that portfolio risk is very high and he wants to reduce the portfolio beta to 0.91.
He is considering two below mentioned alternative strategies:
(i) Dispose-off a part of his portfolio to acquire risk free securities, or
(ii) Take appropriate position on NIFTY Futures which are currently traded at 8125 and each NIFTY
point is worth ₹200.
Calculate:
(1) Portfolio beta
(2) The value of risk-free securities to be acquired
(3) The number of shares of each company to be disposed-off,
(4) The number of NIFTY contracts to be bought/sold; and
(5) The value of portfolio beta for 2% rise in NIFTY.
Ans: i) Calculating Portfolio Beta
• Total investment in portfolio = {3L x 500} + {4L x 750} + {2L x 250} = ₹5000 lacs.
• Portfolio Beta = Weighted average Beta = 1.4 x 1500 + 1.2 x 3000 + 1.6 x 500 = 1.3
5000 5000 5000

(ii) Required Beta = 0.91

• Let the amount invested in existing portfolio be “a”
• Portfolio Beta = 1.3a / 5000 + 0 (beta of rf securities =0)
• 0.91 = 1.3a / 5000
• a = ₹ 3500 lacs

» Portfolio manager should acquire risk-free securities worth ₹ 1500 lacs (5000 – 3500) by disposing
off the same amount of existing portfolio.

(iii) Calculating Number of shares to be disposed-off:

# New req. Investment Required Qty (lacs) Qty. to be disposed off
A 1500/5000 x 3500 = 1050 2.1 3 - 2.1 = 0.9 lacs
B 3000/5000 x 3500 = 2100 2.8 4 - 2.8 = 1.2 lacs
C 500/5000 x 3500 = 350 1.4 2 - 1.4 = 0.6 lacs
Finance Acharya Jatin Nagpal 9A.11 Krivii Eduspace
(iv) Number of Index futures = Vh x (TB – CB) = 5000 L x (0.91 – 1.3) = -1200 contracts
IFP x Lot size 8125 x 200
i.e. short 1200 contracts.

(v) If Nifty rises by 2% (₹ in lacs)

• Change in share value = 5000 x (2% x 1.3) = 130
• Change in Nifty futures = (8125 x 2%) x 200 x (-120) (39)
Net Change = 91

• Net change in portfolio = i.e., 91/5000 = 1.82%

• Portfolio Beta = Change in portfolio value = 1.82% = 0.91

Change in Nifty value 2%

Arbitrage using Futures

# Ques 11 – Xavier {SM TYK, N18 RTP (Old), N22 MTP 1}

The share of Xavier Ltd. is currently selling for ₹ 300. Risk free interest rate is 0.8% per month.
A three-month futures contract is selling for ₹312. Develop an arbitrage strategy and show what
your riskless profit will be 3 months hence assuming that Xavier Ltd. will not pay any dividend in
the next three months.
3
Ans: Fair Futures Price = 300 x 1.008 = ₹ 307.26
Since, prevailing futures price (312) ≠ fair futures price (307.26). So, arbitrage is possible.

(ii) Constructing arbitrage:

• Step 1 - Arbitrageur will buy ABC Stock at ₹300 by borrowing for 3 months.
• So, total outflow after 3 months = 300 x 1.0083 = ₹307.26

• Step 2 - Arbitrageur will settle futures at ₹312. So, his inflows are ₹312.

» Arbitrage profit = 312 – 307.26 = ₹ 4.74

# Ques 12 - Bottoms up {SM TYK, N19 RTP (Old), N23 MTP 1, M24 RTP}
Calculate the price of 3 months Bottoms up futures, if the co.' stock (FV ₹10) quotes ₹220 on NSE
and the three months future price quotes at ₹230 and the one month borrowing rate is given as
Simplified AFM Ques Bank 9A.12 Derivatives (Futures)
15% p.a. and the expected annual dividend is 25%, payable before expiry. Also examine arbitrage
opportunities.
Ans: Futures Price (F) = Spot + Cost of carry - Dividend
F = 220 + (220 x 0.15 x 3/12) – 0.25 x 10 = 225.75
(Entire dividend of ₹2.50 is payable before expiry.)

(ii) Constructing arbitrage:

# Step 1 - Arbitrageur will buy ABC Stock at ₹220 by borrowing at 15% for 3 months. So, outflows are:
Cost of Stock 220
Add: Interest @ 15 % for 3 months = 220 × 0.15 × 0.25 8.25
Total Outflows (A) 228.25

# Step 2 - Arbitrageur will settle futures at ₹230 and will receive dividend for his stock. So, inflows are:
Sale proceeds of futures 230
Dividend: 10 x 25% 2.50
Total inflows (B) 232.5

» Arbitrage profit = B – A = 232.5 – 228.25 = ₹ 4.25.

Hedge ratio

# Ques 13 – Surya {Dec 21 RTP (Old), N23 RTP}

Surya Ltd. is long on 10MT of copper@ ₹474 per kg (spot) and intends to remain so for the ensuring
quarter. The standard deviation of changes of its spot and future prices are 4% and 6% respectively,
having correlation coefficient of 0.75. What is the hedge ratio? What is the amount of the copper
future it should short to achieve a perfect hedge?
Ans: Hedge ratio = σs x rs,f = 4% x 0.75 = 0.5
σf 6%

» Value of short futures = {(474 x 10) x 1000} x 0.5 = 23,70,000

Discrete or Special Ques

Beta of a portfolio consisting of both Equity + Futures position

# Ques 14 – Vayu {SM TYK, N20 RTP (Old), Jul 21 Exam (New), M24 MTP 1}
Finance Acharya Jatin Nagpal 9A.13 Krivii Eduspace
Vayu is having in its portfolio shares worth ₹85 Lakhs at current price and cash ₹15 Lakhs. The
beta of shares portfolio is 1.6. After 3 Months the price of shares dropped by 3.2%. Determine:
(i) Current portfolio beta.
(ii) Portfolio beta after 3 months if trader on current date goes for long position on ₹100L Nifty futures.
Ans: (i) Portfolio beta = 0.85 x 1.6 + 0.15 x 0 = 1.36

ii) Calculation of portfolio beta

• value of shares after 3-months: = 85L x (1-0.032) = 82.28L

# Value of long futures

• Shares having a beta of 1.6 fell by 3.2%.
• Beta = change in value of shares
change in value of market index

• 1.6 = -3.2% / Change in market index

• Change in market index = 2%
• Nifty futures value = 100 x (1-0.02) = 98L

» Portfolio beta = weighted average beta = {82.28L x 1.6} + {15L x 0} + {98L x 1} = 2.36
82.28L + 15L

Note: No amount is paid for futures (unlike shares etc.). So, we do not take value of index in the denominator.

Calculating closing value of portfolio using CAPM

# Ques 15 – Padma {SM TYK, M19 RTP Old, N20 Exam Old, Jul 21 Exam, M22 RTP, N22 MTP 1}
BSE (cash market) 5000
Imp Value of portfolio ₹10,10,000
Risk free interest rate 9% p.a.
Dividend yield on index 6% p.a.
Beta of portfolio 1.5
Mrs. Padma assume that a future construct on the BSE index with four months maturity is used to
hedge the value of portfolio. One future contract is for delivery of 50 times the index.
Based on the above information calculate:
(i) Fair price of 4 Months future contract.
(ii) The gain on short futures position if cash market turns out to be 4,500 in three months.
Simplified AFM Ques Bank 9A.14 Derivatives (Futures)
(iii) Value of portfolio after 3 months using CAPM (a) without Hedging (b) with Hedging
Ans: Futures price = 500 x {1 + (0.09 – 0.06) x 4/12} = 5050
• Value of futures contract = 5050 x 50 = 2,52,500
• No. of futures contracts = (10,10,000 x 1.5) /252500 = 6 contracts

ii. Value of future contract after 3 months should be

• 4500 x {1 + (0.09 – 0.06) x 1/12} = 4511.2512
• Gian = (5050 – 4511.2512) x 50 x 6 = 161624.64

iii. Value of portfolio using CAPM

• Market return (3 months) = Capital gain yield + Dividend yield
= (4500 – 5000) + (6% x 3/12) = –8.5% for 3 months.
5000
• Rf for 3-months = 9% x 3/12 = 2.25%
• CAPM return = Rf + (Rm – Rf).β = 2.25% + (-8.5% - 2.25%) x 1.50 = -13.875%

a) Value of portfolio without hedging = 10,10,000 x (1-0.13875) = 8,69,862.5

b) Value with hedging = Portfolio value + Gain on short futures = 869862.5 + 161624.64 = 1031487.14

Short Selling
P&L of Short seller
# Ques 16 – Indra
Mr Indra decides to sell short 10,000 shares of ABC Ltd, which was selling a yearly high of £ 5.60.
His broker requested him to deposit a margin requirement of 45% and commission of £1550. While
Mr Indra. short the share, ABC ltd. paid dividend of £0.25 per share. At the end of one year he buys
10,000 shares of ABC Ltd. at £ 4.50 to close out position and was charged a commission of £ 1450.
You are required to calculate his return on Investment taking opportunity cost of dividend loss.
Ans: Profit / (loss) on short sale (£)
Sold shares: 5.60 x 10,000 56000
(-) Bought shares: 4.50 x 10,000 (45000)
= 11000
(-) Dividends re-imbursed by short: 0.25×10,000 (2,500)
(-) Brokerage: 1550 + 1450 (3,000)
Profit on short sale: 5,500
Finance Acharya Jatin Nagpal 9A.15 Krivii Eduspace
# Calculating of initial investment
Margin money = {5.6 x 10,000} x 45% 25200
+ Brokerage at the time of entering into contract 1550
Total: 26,750

• Return on investment = Return / Investment = 5500/26750 = 20.56%

P&L of Stock lender

# Ques 17 – Amazon {M22 RTP, M23 MTP 2, N24 RTP}
Mr. Amazon is holding 10,000 shares of face value of ₹100 each of M/s. XYZ Ltd. He wants to hold
these shares for long term and have no intention to sell.
On 1st Jan 2020, M/s. ABC Ltd. has made short sales of M/s. XYZ Ltd.’s shares and approached Mr.
Amazon to lend his shares under Stock Lending Scheme with following terms:

1. Shares to be borrowed for 3 months from 01-01-20 to 31-03-20.

2. Lending Charges/Fees of 1% to be paid every month on the closing price of the stock quoted in Stock
Exchange.
3. Bank Guarantee will be provided as collateral for the value as on 01-01-2020.

Other Information:
(a) Cost of Bank Guarantee is 8% per annum,
(b) On 29-02-2020 M/s XYZ Ltd., declared dividend of 25%,
(c) Closing price of M/s. XYZ Ltd.’s share quoted in Stock Exchange on various dates are as follows:

Date Share price in case 1 – Bullish Share price in case 2 - Bearish

01-01-2020 1000 1000
31-01-2020 1020 980
29-02-2020 1040 960
31-03-2020 1050 940

You are required to find out:

(i) Earning of Mr. Amazon through Stock Lending Scheme in both the scenarios.
(ii) Total Earnings of Mr. Amazon during 01-01-2020 to 31-03-2020 in both the scenarios.
(iii) What is the Profit or loss to M/s. ABC by shorting the shares using through Stock Lending Scheme
in both the scenarios?
Simplified AFM Ques Bank 9A.16 Derivatives (Futures)
Ans: Earnings of Mr. Amazon through stock lending scheme

(i) Lending fee Case 1 Case 2

31-01-20: 1020 x 1% and 980 x 1% 10.20 9.80
29-02-20: 1040 x 1% and 960 x 1% 10.40 9.60
31-03-20: 1050 x 1% and 940 x 1% 10.50 9.40
Earnings from lending per Share (A) 31.10 28.80
Total No. of Shares 10000 10000
Total Earning from Lending 3,11,000 2,88,000

(ii) Total earnings of Mr. Amazon

Dividend income per Share (B) 25 25
Total earnings per share (A) + (B) 56.10 53.80
Total No. of Shares 10000 10000
Total Earning 5,61,000 5,38,000

(iii) Gain or loss on Short sales

(1,050 - 1,000) and (1,000 - 940) (50.00) 60.00
Lending fees paid per share (31.10) (28.80)
Bank guarantee charges @ 8% p.a. (20.00) (20.00)
Gain Per Share (101.10) 11.20
Total No. of Shares 10000 10000
Total Gain on shortening the shares (10,11,000) 1,12,000
Finance Acharya Jatin Nagpal 9A.17 Krivii Eduspace

Additional Questions
Basic practice ques

Basic P&L on futures position

# Ques 1 – Ahalya {N19 Exam (New)}
A future contract is available on Ahalya Ltd. that pays an annual dividend of ₹4 and whose stock is
currently priced at ₹125. Each future contract calls for delivery of 1,000 shares to stock in one year
daily marking to market. The corporate treasury bill rate is 8%. Required:
(i) Given the above information, what should the price of one future contract be?
(ii) If the company stock price decreases by 6%, what will be the price of one futures contract?
(iii) As a result of the company stock price decrease, will an investor that has a long position in one future
contract of Ahalya Ltd. realizes a gain or loss? What will be the amount of gain or loss?
(Ignore margin and taxation, if any)
Ans: Futures price = Spot + Cost of carry – Dividend = 125 + (125 x 0.08) – 4 = ₹131
• Price of one futures contract = 131 x 1000 = ₹131,000

ii) Futures price if stock falls by 6% (stock price = 125 x 0.94 = ₹117.5)
• Futures price = 117.5 + (117.5 x 0.08) – 4 = 122.90
• Price of one futures contract = 122.90 x 1000 = ₹122,900

iii) Calculation of profit / (loss) ₹

Long (bought) futures at: (131,000)
Short (sold) futures at: 122,900
Loss: 8,100

Hedging using futures

P&L in case of perfect hedging

# Ques 2 – Pyaralal {Dec 21 Exam (New)}
Mr. Pyaralal bought 1000 equity shares of PL ltd. at ₹700 per share. Beta of PL ltd. is 1.25. He hedged
his position by going short on Nifty futures contract which is currently quoted at 17,500 and has a
Simplified AFM Ques Bank 9A.18 Derivatives (Futures)
lot size of 50.
(i) Please advise the investor how to hedge his market exposure using the available data.
(ii) Calculate the profit / loss of Mr. Pyaralal in following situation:
(a) Nifty future rise by 10%
(b) PL ltd. falls by 5%.
(iii) Is it possible stock as well as nifty to raise or fall at the same percentage? Please state the reason.
Ans: (i) Investor can use Nifty futures to hedge his exposure.
• Number of Nifty futures = 700 x 1000 x (0 – 1.25) = - 1 contract i.e. Short 1 contract.
17,500 x 50

(ii) P&L Calculation:

(a) Case A – Nifty future rise by 10% ₹
PL ltd: 1000 x 700 x (10% x 1.25) 87,500
Nifty future: -1 x 875,000 x 10% (87,500)
Gain / (loss): Nil

(b) Case B – PL ltd. falls by 5%. ₹

PL ltd: 1000 x 700 x -5% (35,000)
Nifty future: -1 x 875,000 x -4%* 35,000
Gain / (loss): Nil

Note: If PL ltd. falls by 5%, then Nifty should fall by = 5%/1.25 = 4%.

(iii) Normally it is not possible that Nifty to rise or fall by same percentage because of systematic risk
i.e. Beta may not be the same as of market.

Reverse calculating Beta (using Hedging formula)

# Ques 3 - Harsha
On 1-04-2015, Harsha was holding a portfolio of 10 securities whose value was ₹9,94,450. Weighted
average of beta of 9 securities 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 contracts of NIFTY Futures (Multiplier of 25)
expiring in May 2015, which was trading at 8767.07 on 1st April.
(i) Calculate the beta of the 10th security.
(ii) Reconcile the reasons in spite of 2% fall in the market as per Harsha’s apprehension if she would
have earned some profit on her cash position.
Finance Acharya Jatin Nagpal 9A.19 Krivii Eduspace
Ans: Let overall portfolio Beta be β. then we can say that:

• Number of Index futures to be traded = Vh x (TB – β)

IFP x Lot size

• -5 = 994450 x (0 – β) => β = 1.102 (approx.)

8767.07 x 25

# Portfolio Beta = weighted average Beta.

Let Beta of 10th security be ‘a’
1.102 = 1.10 x 0.9 + 0.10a
a = 1.12
» Beta of 10th security = 1.12

(ii) The main reason for the profit in cash position might be due to reason that contrary to her
expectation of fall in the value of cash position there may be increase in value of cash position.

Low Probability – Unique Questions

Reverse cal. No. of futures traded & Beta of stock from P&L figure
# Ques 4 – Baka consultant
Mr. Careless was employed with Baka Consultant. Mr. Ganchakkar their regular client purchased
1,00,000 shares of X Inc. at a price of $22 and sold 50,000 shares of A plc for $40 each having
beta 2. Mr. Careless advised Mr. Ganchakkar to take a position* in index future trading at $1,000
each contract. Though Mr. Careless noted the name & beta of A plc but forgot to record the beta
value of X inc.
On next day Mr. Ganchakkar closed out his position when:
• Share price of X Inc. dropped by 2%
• Share price of A plc. Appreciated by 3%
• Index Future dropped by 1.5%

Mr. Ganchakkar, informed Mr. Careless that he made a loss of $1,14,500 due to the position taken.
Since the records of Mr. Careless are incomplete, he has requested you to calculate the:
i) Number of futures contract he advised Mr. Ghanchakkar to trade.
Simplified AFM Ques Bank 9A.20 Derivatives (Futures)
ii) Beta of X Inc shares.
Note: The original ques of ICAI stated that Mr. Careless advised to take a short position in futures. Which
is wrong. Because here in this ques a long futures position is required to obtain the hedge.
Ans: i) Let number of futures contracts traded be ‘n’.

# Calculation of profit / (loss) after 1-day Gain / (loss)

X Inc: 100,000 x 22 x -2% = (44,000)
A Plc: -50,000 x 40 x 3% = (60,000)
Index futures: n x 1000 x -1.5% = (15n)
Total Gain / (loss): (1,14,500)

Hence, => (44000) + (60,000) + (15n) = (114,500)

=> n = 700

• Number of futures contracts traded = 700 i.e. Long 700 contracts

• Therefore, total value of futures bought to hedge the position = 700 x 1000 = 7,00,000 … (1)

ii) Beta of stock

Let Beta of X Inc stock be ‘a’.
# Shares Value Beta Position Index hedge
• X Inc 100,000 x 22 = 22L a Long 22L*a short
• A Plc 50,000 x 40 = 20L 2 Short 40L long
-> Net position (value of futures required to hedge): 40L – 22L*a … (2)

From (1) and (2), we can say:

• 7,00,000 = 40,00,000 – 22,00,000*a
• 22,00,000*a = 33,00,000
• a = 33/22 => 1.5
Hence, Beta of shares is 1.5

Calculating Implied RF from Arbitrage profit

# Ques 5 – Vaikuntha
Suppose current price of an index is ₹13,800 and yield on index is 4.8% (p.a.). A 6-month future
contract on index is trading at ₹14,340. Assuming that Risk Free Rate of Interest is 12%, show how
Mr. Vaikuntha (an arbitrageur) can earn an abnormal rate of return irrespective of outcome after 6
Finance Acharya Jatin Nagpal 9A.21 Krivii Eduspace
months. You can assume that after6 months index closes at ₹10,200 and ₹15,600. Also calculate
implied risk-free rate of return on investment. Do not incorporate borrowing point.
Ans: Futures price = 13800 x {1 + (0.12 – 0.048) x 6/12} = 14,296.8
• Current futures price = 1430
• Arbitrage is possible.

Steps for arbitrage

1. Sell index futures at ₹14340.
2. Buy a portfolio of shares replicating the index at a cost of ₹13800 (i.e., spot rate).

i. If index closed at ₹10,200

Profit from short position: 14340 – 10200 = 4140
(+) Dividend on portfolio: 13800 x 4.8% x 6/12 = 331.2
(-) Loss on portfolio: 10200 – 13800 = (3600)
Total arbitrage profit: = 871.20

Note: Borrowing cost is ignored as it is explicitly mentioned in ques to ignore borrowing cost.

ii. If index closed at ₹15,600

Loss on short position: 14340 – 15600 = 1260
Dividend on portfolio: 13800 x 4.8% x 6/12 = 3312
(+) Profit on portfolio: 15600 – 13800 = 1800
Total arbitrage profit: = 871.20
(Again, borrowing cost is to be ignored.)

# Implied Rf calculation
• Implied Rf = Return = 871.20 = 6.31% for 6-months ie. 12.63% p.a.
Investment 13800

Calculation of Open interest

# Ques 6 – Shizune {KE in-house}
M/s Shizune took following trades in Metal B Inc futures.
Date Futures price Action
4-May 1680 Long 15 Contracts
12-May 1740 Short 10 contracts
Simplified AFM Ques Bank 9A.22 Derivatives (Futures)
14 May 1760 Short 7 contracts
19 May 1815 Long 2 contracts
You are required to show the open interest (OI) of M/s Shizune for each of the above dates. Also
calculate the net profit / loss from all the above trades. A commission of ₹30 is charged whenever
a contract is bought or sold.
Ans: Date Action Open Interest
4-May Long 15 Contracts 15 lots – Long futures
12-May Short 10 contracts 5 lots – Long futures
14 May Short 7 contracts 2 lots – Short futures
19 May Long 2 contracts 0 lots – No open interest

Calculating Profit / loss

Short futures: (10 x 1740) + (7 x 1760) 29,720
(-) Long futures: (15 x 1680) + (2 x 1815) (28,830)
Profit: 890
(-) Commission: 34 x 30 (1020)
Net Profit / (loss): (130)