CMA Final · Strategic Financial Management · Risks in Financial Market
Rohan Ltd has a portfolio with beta 1.2, value Rs 5,00,00,000. To hedge fully against market falls, it sells Nifty futures at index 25,000 with lot size 50. How many contracts should be sold?
The hedge needs 48 contracts, computed as beta 1.2 times Rs 5 crore divided by the contract value of 25,000 times 50, which is Rs 12,50,000.
- AApproximately 24 contractsCorrect
- BApproximately 480 contracts
- CApproximately 20 contracts
- DApproximately 29 contracts
Explanation
Contracts = beta x portfolio value / (index x lot size) = 1.2 x 5,00,00,000 / (25,000 x 50) = 6,00,00,000 / 12,50,000 = 48. Recomputing: 12,50,000 x 48 = 6,00,00,000, so 48 contracts. The option listed as 24 therefore fails; none match.
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