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CMA Final · Strategic Financial Management · Forwards and Futures

Arjun Traders holds a portfolio worth Rs 5 crore with a beta of 1.2 and wants to reduce its beta to 0.6 using Nifty futures. Nifty futures is quoted at 20,000 with a lot size of 50 units. How many contracts should be sold?

Sell 30 contracts. The beta reduction needed is 0.6, applied to a Rs 5 crore portfolio gives Rs 3 crore of exposure to remove. Each contract covers 20,000 times 50, which is Rs 10 lakh, so 3 crore divided by 10 lakh gives 30.

  1. A10 contractsCorrect
  2. B5 contracts
  3. C15 contracts
  4. D30 contracts

Explanation

Number of contracts = (target beta - current beta) x portfolio value / (futures price x lot size) = (0.6 - 1.2) x 5,00,00,000 / (20,000 x 50 = 10,00,000) = -3,00,00,000/10,00,000 = -30, i.e. sell 30. So the correct figure is 30 contracts, and the option listing 10 uses a beta change of 0.2 mistakenly.

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