1.

Ajay took a short position in 5 lots of July Infy futures on July 5, 2019 at a price of
735.20. The daily settlement prices for the futures contract are tabulated below. Ajay
squared off the position on July 15 at a price of 778.15. Compute the daily mark-to-
market gain or loss and the final gain or loss for Ajay’s position. Lot size of Infy futures
is 1200.
Day July 5 July 8 July 9 July 10 July 11 July 12 July 15
Settlement 722.05 720.75 717.90 720.15 724.50 729.65 780.10
Price

2. HDFC stock is trading at Rs.2200 today. What should be fair value of HDFC futures
maturing after 90 days if risk-free rate is 8% and after 45 days the stock is expected to
give a dividend of Rs.30? What should be fair value in the absence of any dividend?
Assume annual compounding.

3. The dividend yield on Nifty is estimated to be 5%. If the continuously compounded risk-
free rate is 8%, the current value of the stock index is 11290 and the 1-month index
futures is priced at 11313, is there an arbitrage opportunity?

4. An Indian exporter has entered into a 3-month forward contract to sell 5 million USD to
the bank at a rate of Rs.67.0525 per USD. Two months have passed and the current
forward rate for delivery of USD in one month is Rs.66.9515 per USD. If the one-month
domestic interest rate is 8% p.a. what is the value of the exporter’s short forward
position?

5. The spot GBP/USD rate is USD 1.60. 3-month interest rates are 6% for USD and 8% in
GBP continuously compounded. What is the arbitrage-free 3-month forward price?
Suppose the 3-month forward is actually quoting at USD 1.615, what is the arbitrage
strategy to be adopted?

6. A bond is currently traded at Rs.95. A coupon of Rs.5 is expected at the end of three
months from today. If interest rates are 10% p.a. continuously compounded what should
be the fair price of a six-month forward contract on this bond? If the forward price is
Rs.95.25 what is the arbitrage opportunity?
7. On November 23 a farmer expects to harvest 800 quintal of soyabean by middle of
February. Soyabean is currently quoted in the Indore mandi at Rs.3798 per quintal.
Futures contracts are traded on the NCDEX at the following prices:
Expiry month Lot size Price- Nov 23
18-Dec-2015 10 MT 3874
20-Jan-2016 10 MT 3968
19-Feb-2016 10 MT 4092
How should the farmer hedge his price risk? How many futures contracts should be
used for the hedge? On February 10 the farmer is able to sell the entire harvest of
800 quintals at an average price of Rs.3900 per quintal. On the sam e day he closes
the futures position at Rs.3912. What is the effective price realized by him? Each
soyabean futures contract has a lot size of 10 MT. (1 metric tonne = 10 quintals) .

8. Indian Silver produces silver jewellery and sells all over India. On January 1, the
company estimates that it will need 300 kg of silver on April 20 and is concerned that
silver prices may go up in the meantime. On Jan 1 the spot price of silver is Rs.27,175
per kg. Silver futures are available on NCDEX with expiry April 20 and lot size 30 kg.
April futures are traded at Rs.28450. Show how the company will hedge using NCDEX
silver futures.

9. An oil refinery needs 1075 barrels of crude oil in the month of December. The current
price of crude as on September 9 is Rs.4150 per barrel. December futures contract on
MCX is trading at Rs.4230. The cost of capital, insurance and storage works out to 15%
p.a. continuously compounded. The refiner expects the price to rise further beyond
Rs.4230 in December. It cannot buy the required quantity at present due to cash flow
constraints. What strategy should be adopted by the refiner? If the refiner decides to
hedge using futures contracts find out the effective price it would have to pay at the time
of lifting the hedge if (i) spot and futures are Rs.4000 and Rs.4050 respectively and (ii)
Rs.4300 and Rs.4350 respectively. Assume size of one contract is 100 barrels.

10. On November 20 the spot price of jute is Rs.2198 per 100 kg and December jute futures
expiring on December 15 are traded at Rs.2276. The standard deviation of spot price
change is estimated at Rs.260 while that of the futures price change is Rs.248. The
correlation coefficient of spot and futures price is estimated at 0.99. Calculate the hedge
ratio.

11. Indigo Air uses 20,000 barrels of aviation fuel every month. On January 1, the company
wants to hedge the price risk of aviation fuel for end-February. As there are no aviation
fuel futures the CFO decides to hedge using the crude oil futures contract expiring on
February 28. Contract size is 100 barrels and the February futures trade at USD 72 on
January 1. The standard deviation of aviation fuel price changes is USD 6 while that of
the crude oil futures price is USD 4. The correlation between price changes of aviation
fuel and crude oil is 0.90. How should Indigo hedge its exposure?

12.
13. An American exporter will receive 25 million Norwegian Kroner (NOK) in three months
and wishes to hedge against fluctuations in USD-NOK exchange rate. As there is no
active forward market in NOK the company decides to hedge using forwards on euro.
Historical data show that the standard deviation of quarterly changes in the USD/NOK
exchange rate is 0.005 while that of quarterly changes in USD/EUR forward rate is 0.025
and correlation between these changes is 0.85. Explain the minimum-variance hedge that
should be adopted by the company.

14. A high net worth investor holds a portfolio of equity shares. The investor is of the
view that the market will decline sharply over the next three months. He therefore
wants to reduce the risk in his portfolio by taking exposure in the index futures.
Three-month Nifty futures contract is currently quoting at a price of Rs. 10800 with a
lot size of 75. What position should the investor take in the Nifty futures to hedge the
risk? How many futures contracts should he buy or sell? Assuming that the investor
requires an overall portfolio beta of 0.80, HOW MANY CONTRACTS SHOULD HE BUY OR
SELL? Portfolio details are as given below

Scrip Number Price Beta

of shares

Maruti 10000 5600 1.30

SBI 20000 300 1.20
Infosys 10000 780 1.10
ITC 40000 250 0.65

15. Welspun Textiles needs to borrow Rs.100 crore for working capital requirements 30
days from today for a period of 180 days. ICICI Bank quotes a 30/210 FRA at
7.50%-8.00%. The Company is able to borrow at MIBOR + 100 basis points. Show
that by buying the FRA the Company is hedged against interest rate risk if at the
settlement date MIBOR is (a) 7.5% or (b) 6.5%. Assume 360 days in a year.