CMA Final · Strategic Financial Management · Forwards and Futures
A portfolio manager holds equity worth ₹5,00,00,000 with a beta of 1.2. She wants to reduce beta to 0.6 using Nifty futures. Nifty futures are at 25,000 with a lot size of 50 units (index beta 1.0). How many contracts should she sell?
She should sell 24 contracts. The beta must fall by 0.6, so the hedge value is 0.6 times ₹5 crore, which is ₹3 crore, and dividing by the contract value of ₹12.5 lakh gives 24 contracts.
- A24Correct
- B48
- C20
- D12
Explanation
Contract value = 25,000 x 50 = ₹12,50,000. Number of contracts = (1.2 - 0.6)/1.0 x 5,00,00,000 / 12,50,000 = 0.6 x 40 = 24. Selling 48 would remove the whole 1.2 beta twice over (that is 1.2 x 40 = 48, hedging to zero beta), which overshoots the target.
Did you get it right without looking?
One question tells you little. A timed set on Forwards and Futures shows your real accuracy, how long you take and where you lose marks.
More Forwards and Futures questions
- The spot price of gold is ₹60,000 per 10 grams. Storage costs are ₹600 per 10 grams for a year, payable at the end of the year, and the risk…
- Sundaram Exports holds a portfolio worth ₹5,00,00,000 with a beta of 1.2 against Nifty. It wants to cut beta to 0.6 using Nifty futures pric…
- A portfolio manager holds equity worth ₹5 crore with a beta of 1.2 and wants to reduce beta to 0.6 using Nifty futures. Nifty futures trade …
- The spot price of gold is ₹60,000 per 10 grams. Storage cost is ₹600 per 10 grams per year payable at the end of the year, and the interest …
- Nifty spot is 22,000. The risk-free rate is 9% per annum and the index dividend yield is 3% per annum, both continuously compounded. The 3-m…
- Shares of Kaveri Motors trade at ₹800 in the spot market. No dividend is expected during the next 3 months. The continuously compounded risk…