Part 1

Derivatives
Problem 1 solve
Today Date: 09/04/2020
Commodity: Gold
Qty.: 10 grams
Price: 4,500/Gram
Total transaction value: 4,500*10=45,000
Kalyan Jewelers (Sellers)
You (Buyer)
Agree to deliver 25/04/2020
Advance Money: 5,000
Balance: 40,000
Document: Advance Payment Slip
Solution:
Option 1: You Buy the gold by paying balance Rs. 40,000 on 25/04/2020
Option 2: Sell the Contract to Person 1 by receiving Rs. 5,000/- (Your Profit is Nil)
Option 3: Sell the Contract to Person 2 by receiving Rs. 6,000/- (Your Profit is Rs.
1,000)
If Gold Price on 25/04/2020 hits Rs. 5,000/Gram.
Total 5,000*10grams = Rs. 50,000
Rs. 6,000 for me and Rs. 40,000 for Kalyan Jewelers
=Rs. 6,000+Rs.40,000= Rs. 46,000

Option 4: Sell the Contract to person 3 by receiving Rs. 3,000/- (Your Loss of Rs.
2,000)
Find profit for Person 3 if Gold Price On 25/04/2020 is
S1: Rs. 4,500/Gram =
S2: Rs. 4,000/Gram =
S3: Rs. 5,000/Gram =
Also find the Profit or Loss for You
Option 5: Keep advance payment slip (loss of Rs. 5,000)
or
Buy gold by paying Remaining Rs. 40,000, Keep 10 Grams of gold for some
time and then sell it to some other person when I will be able to make profit (sell
for a price greater than Rs.4,500/Gram.)
S1: 3,500*10=35,000
35,000-45,000= -10,000
S2: 6,000*10=60,000
60,000-45,000= 15,000
Forward Contracts
Problem 1
Farmer 1 500 Kgs of Wheat BM 1
Farmer 2 Rs. 40/KG
Farmer 3
Farmer 4
OR

Rs. 40/KG BM 2
BM 3
BM 4
OR

Farmer 2 Rs. 40/KG BM 2
Farmer 3 Rs. 20,000 BM 3
BM 4
Solution :
Delivery Date: After 3 Months
Option 1: Farmer will deliver 500 Kg’s of Wheat and BM will Pay Rs. 20,000.
Option 2: Farmer may attempt to Deliver 500Kg’s of Wheat but BM may fail to
take delivery of wheat and Payment.
Option 3: Farmer may fail to deliver 500Kg’s of Wheat whereas BM is willing
to buy at Rs. 20,000.
If Farmer is not able to deliver:
Option 4: Arrange the delivery of 500Kg’s of Wheat from Farmer 2.
Option 5: He can transfer the contract to Farmer 2 for delivery of 500 Kg’s of
Wheat.
If B M is not able to take delivery:
Option 6 (Shortage of Cash): He can make loan or he can ask farmer some time
to make payment.
Option 7: Transfer the contract to BM 2 to take delivery of 500 Kg’s of Wheat.
Settlement of Futures contract
Problem 1
Underlying: MRF Shares
Market Lot: 1 Contract i.e. 100 Shares
Contract Date: 22/04/2020
Expiry Date: 30/04/2020

Current Market Price: Rs. 68,000/Share
Contract Price: Rs. 66,000/Share
Margin (10%): Rs. 6,600/Share
Solution:
Value of Transaction: 66,000*100 = 66,00,000
Total Margin Payable: 6,600*100 = 6,60,000
Without Brokerage
Possibility 1:
Date Contract Margin Position Profit/Loss

Price
22/04/2020 66,000/Share 6,600/Share Long Cannot
Determine
23/04/2020 65,000/Share 6,500/Share Wait/Neutral
25/04/2020 69,000/Share 6,900/Share Short 6,900-6,600
= +300/Share
Overall Profit: 300/Share*100 = 3,00,000
Pay: Rs. 6,60,000
Receive: Rs. 6,90,000
Profit =Amount Received-Amount Paid
=6,90,000-6,60,000
= Rs. 30,000
Possibility 2:
Date Contract Margin Position Profit/Loss Overall Profit

Price
Determine
29/04/2020 64,500/share 6,450/Share Wait/Neutral
30/04/2020 Take Delivery of 100 Shares Determined
(Notional
Profits/Loss)
Profits/Loss is purely based on Spot price of MRF Shares in BSE /NSE
Scenario 1:
Spot Price: 30/04/2020 in BSE Rs. 63,000/Share
Through Contract = Rs. 66,000/Share
Notional Profit/Loss: = Price Difference in Spot Market and Futures Market
= 63,000-66,000
= - 3,000/Share i.e. Loss
Overall P/L = -3,000*100
= - 3,00,000
Scenario 2:
Notional Profit/Loss = Price Difference in Spot Market and Futures Market

= 68,000-66,000
= +2,000/Share i.e. Profit
Overall P/L= 2,000*100
= +2,00,000
Problem 2
Underlying: MRF Shares
Market Lot: 1 Contract i.e. 100 Shares
Contract Date: 22/04/2020
Expiry Date: 30/04/2020
Current Market Price: Rs. 68,000/Share
Contract Price: Rs. 66,000/Share
Margin (10%): Rs. 6,600/Share
Solution:
Value of Transaction: 66,000*100=66,00,000
Total Margin Payable: 6,600*100=6,60,000
Without Brokerage
Possibility 1:

Price
Determine
25/04/2020 69,000/Share 6,900/Share Short 6,900-6,600
= +300/Share
Overall Profit:
300/Share*100=3,00,000
Pay: Rs. 6,60,000
Receive: Rs. 6,90,000
Profit =Amount Received-Amount Paid
=6,90,000-6,60,000
= Rs. 30,000
Possibility 2:
Date Contract Margin Position Profit/Loss Overall Profit

Price
Determine
29/04/2020 64,500/share 6,450/Share Wait/Neutral
30/04/2020 Take Delivery of 100 Shares Determined
(Notional
Profits/Loss)
Profits/Loss is purely based on Spot price of MRF Shares in BSE /NSE
Scenario 1:
Notional Profit/Loss:
= Price Difference in Spot Market and Futures Market
= 63,000-66,000
= - 3,000/Share i.e. Loss
Overall P/L = -3,000*100
= - 3,00,000
Scenario 2:
Notional Profit/Loss:
= Price Difference in Spot Market and Futures Market
= 68,000-66,000
= +2,000/Share i.e. Profit
Overall P/L= 2,000*100

= +2,00,000
Date Contract Margin Position Profit/Loss Overall

Price Profit
Determine
s
27/04/2020 56,000/Share 5,600/Share Short Determined -Rs.
1,00,000
28/04/2020 59,000/Share 5,900/Share Cannot Take

(Irrelevant)
29/04/2020 46,000/Share 4,600/Share Cannot Take
(Irrelavent)
Possibility 3:
Profit/Loss = Short-Long
= Amount Received-Amount Paid
= 5,600-6,600
= -Rs. 1,000/Share i.e. Loss
Overall Loss = -1,000*100

= Rs. 1,00,000
With Brokerage
Brokerage Charges: 0.1%
Possibility 1:

Price
Determine
25/04/2020 69,000/Share 6,900/Share Short =6,900-6,606.6
=293.4/Share
Cost of Taking Long Position is

= Margin/Share + Brokerage/Share
= 6,600/Share + (6,600*0.1/100)
= 6,600+6.6
= 6,606.6/Share
Overall Profit:
= 293.4*100
= 2,93,400
llustration for short selling
Short Selling Procedure:
1. Borrow from Broker

2. Sell it in Market
3. Wait for Price Fall
4. Repurchase it for lesser price than selling price
5. Return to Broker
Problem 1:
Share Name: Suzlon Energy
Quantity/No. of Shares: 01 Share
Activity Price Profits

Borrow
Sell/Short 10 Cannot be Determined
Wait for Price Fall 9.0

8.5
7.5
6.5
6.0
Repurchase/Long 6.0 Cannot be Determined
Return Pay Brokerage of 50

Paise =10 – 6 - 0.5
=3.5/Share
Underlying: Gold
Lot Size: 1 lot i.e. 10 Grams
Activity Price Profits

Borrow
Sell/Short 40,000/10 Cannot be
Gms Determined
Wait for Price Fall 39,000
38,000
36,000
35,000
Repurchase/Long 35,000 Cannot be
Determined
Return 1,000 =40,000-
35,000-1,000
=+4,000
Share Name: Suzlon Energy
Quantity/No. of Shares: 01 Share
Activity Price Loss

Borrow
Sell/Short 10 Cannot be
Determined
Wait for Price Fall 11.00
10.50
09.00
11.00
12.00
Repurchase/Long 12.00 Cannot be
Determined
Return Pay =10-12-0.5
Brokerage of =2.5/Share
50 Paise
Summing Up:
Market Condition Normal Trade (Long Short Selling (Short

and then Short) and then Long)
Improves (Bullish) Profits Loss
Does not Improve Loss Profits
(Bearish)
Long Position - Short Position
Buy – Sell
Short Position - Long Positions
Sell – Buy
Rebuy – Sell
No. of Profit = No. of Loss
P1 = +Rs. 10,000
P2 = - Rs. 10,000
OR
P1 = +Rs. 10,000
P2 = - Rs. 5,000
P3 = - Rs. 5,000
OR
P1 = +Rs. 10,000
P2 = - Rs. 4,000
P3 = - Rs. 3,000
P4 = - Rs. 3,000
Problems on Margins in Futures
Initial Margin:
Amount to be deposited to open futures trade. The amount initially deposited in
margin account.
Maintenance Margin:
Amount that has to be maintained in Margin account. The amount is just for
reference in making Margin Calls.
Margin Call:
Amount paid to equate the margin account balance to the amount of initial
margin if the balance in margin account goes below maintenance margin.
Problem 1: Gold Futures

Underlying: Gold
Price per gram: Rs. 4,500 (Contract Price)
Lot size: 1 Contract = 10 Grams.
Traded Quantity: 2 Contracts.
Initial Margin: 10%
Maintenance Margin: 75% of Initial Margin
Price of Gold Futures on Different dates:
Date Price/Gram
04/05/2020 4,400
05/05/2020 4,550
06/05/2020 4,600
07/05/2020 4,450
08/05/2020 4,650
Prepare Margin Account
Solution for Problem 1: Gold Futures

Initial Margin = (Contract Price * No. of Units in 1 contract*No. of Contracts)
*10/100
= 4,500/Gram*10 Grams*2 Contracts
= 90,000 * 10/100
= Rs. 9,000
Maintenance Margin = 75% of Initial Margin

= Rs. 9,000*75/100
= Rs. 6,750
Margin Account
Date Settlement Daily Gain Cumulative Margin Account Margin Call
Price (Today’s Price Gain Balance (Depends on
(Market – Previous (Today’s (Previous Day’s Margin a/c
price of Day’s Gain+/- Balance-/-Today’s Balance)
Future Price)*Total Previous Day’s Gain) (Initial Margin-
Contracts) Quantity Balance) Today’s
Balance)
02/05/202 4,500 ----- ----- 9,000 -----
0
04/05/202 4,400 =4,400-4,500 =-2,000 =9,000-2,000 -----
0 =-100 =7,000
=-100*20
=-2,000
05/05/202 4,550 =4,550-4,400 =3,000-2,000 =7,000+3,000 -----
0 =+150*20 =+1,000 =10,000
=+3,000
06/05/202 4,600 =4,600-4,550 =+1,000+1,00 =10,000+1,000 -----
0 =+50*20 0 =11,000
=+1,000 =2,000
07/05/202 4,450 =4,450-4,600 =-3,000+2,000 =11,000-3,000 -----
0 =-150*20 =-1,000 =8,000
=-3,000
08/05/202 4,650 =4,650-4,450 =+4,000-1,000 =8,000+4,000 -----
0 =+200*20 =+3,000 =12,000
=+4,000
Net Profit on this trade is Rs. 3,000
Problem 2: Stock Futures
Underlying: Maruti Suzuki Shares

Price per Share: Rs. 5,300 (Contract Price)
Lot size: 1 Contract = 100 Shares.
Initial Margin: 10%
Price of Maruti Suzuki Futures on Different dates:
Day Price/Share
1 5,400
2 5,200
3 4,900
4 4,800
5 4,700
6 4,900
7 5,000
8 5,100
9 5,200
10 5,700
Solution for Problem 2: Stock Futures
Initial Margin = (Contract Price * No. of Units in 1 contract*No. of Contracts) *

10/100
= (5,300*100*2)10/100
= (10,60,000)*10/100
= 1,06,000

= 1,06,000*75/100
= 79,500
Margin Account
Settlement Daily Gain Cumulative Margin Account Margin Call
Day Price (Today’s Gain Balance (Depends on
(Market Price – (Today’s (Previous Day’s Margin a/c
price of Previous Gain+/- Balance-/-Today’s Balance)
Future Day’s Previous Day’s Gain) (Initial Margin-
Contracts) Price)*Total Balance) Today’s Balance)
Quantity
1 5,400 ----- ----- 1,06,000 -----
2 5,200 =5,200-5,400 =-40,000 =1,06,000-40,000 =1,06,000-
=-200*200 =66,000 66,000
=-40,000 =66,000+40,000 =40,000
=1,06,000
3 4,900 =4,900-5,200 =-40,000- =1,06,000-60,000 =10,6000-46,000
=-300*200 60,000 =46,000 =60,000
=-60,000 =-1,00,000 =46,000+60,000
=1,06,000
4 4,800 =4,800-4,900 =-20,000- =1,06,000-20,000 ------
=-100*200 1,00,000 =86,000
=-20,000 =-1,20,000
5 4,700 =4,700-4,800 =-20,000- =86,000-20,000 =1,06,000-
=-100*200 1,20,000 =66,000 66,000
=-20,000 =-1,40,000 =66,000+40,000 =40,000
=1,06,000
6 4,900 =4,900-4,700 =+40,000- =1,06,000 -----
=+200*200 1,40,000 40,000
=+40,000 =-1,00,000 =1,46,000
7 5,000 =5,000-4,900 =+20,000- =1,46,000+20,000 -----
=+100*200 1,00,000 =1,66,000
=+20,000 =-80,000
8 5,100 =5,100-5,000 =+20,000- =1,66,000+20,000 -----
=+100*200 80,000 =1,86,000
=+20,000 =-60,000
9 5,200 =5,200-5,100 =+20,000- =1,86,000+20,000 -----
=+100*200 60,000 =2,06,000
=+20,000 =-40,000
10 5,700 =5,700-5,200 =+1,00,000- =2,06,000+1,00,00 -----
=+500*200 40,000 0
=+1,00,000 =+60,000 =3,06,000
Problem 3: Indices Futures: Solve

Underlying: NIFTY
NIFTY: Rs. 9,100 (Contract Price)
Lot size: 1 Contract = 30 Indices.
Initial Margin: 10%
NIFTY Futures on Different dates:
Day NIFTY
1 9,400
2 9,000
3 8,500
4 8,200
5 7,600
6 8,900
7 9,800
Solution for Problem 3: Indices Futures

Underlying: Gold
Position: Short
Price per gram: Rs. 4,500 (Contract Price)
Lot size: 1 Contract = 10 Grams.
Initial Margin: 10%
Date Price/Gram
04/05/2020 4,400
05/05/2020 4,550
06/05/2020 4,600
07/05/2020 4,450
08/05/2020 4,650
Solution:

*10/100
= 4,500/Gram*10 Grams*2 Contracts
= 90,000 * 10/100
= Rs. 9,000

= Rs. 9,000*75/100
= Rs. 6,750
Margin Account
Date Settlement Daily Gain Cumulative Margin Margin
Price (Previous Gain Account Call
(Market Day’s Price (Today’s Balance (Depends on
price of – Today’s Gain+/- (Previous Margin a/c
Future Price)*Total Previous Day’s Balance)
Contracts) Quantity Day’s Balance-/- (Initial
Balance) Today’s Gain) Margin-
Today’s
Balance)
02/05/202 4,500 ----- ----- 9,000 -----
0
04/05/202 4,400 =4,500-4,400 +2,000 =9,000+2,000 -----
0 =+100*20 =11,000
=+2,000
05/05/202 4,550 =4,400-4,550 =- =11,000-3,000 -----
0 =-150*20 3,000+2,000 =8,000
=-3,000 =-1,000
06/05/202 4,600 =4,550-4,600 =-1,000- =8,000-1,000 -----
0 =-50*20 1,000 =7,000
=-1,000 =-2,000
07/05/202 4,450 =4,600-4,450 =+3,000- =7,000+3,000 -----
0 =+150*20 2,000 =10,000
=+3,000 =+1,000
08/05/202 4,650 =4,450-4,650 =- =10,000-4,000 =9,000-
0 =-200*20 4,000+1,000 =6,000+3,000 6,000
=-4,000 =-3,000 =9,000 =3,000
Net Loss is Rs. 3,000
Problem 5: Stock Futures: Solve
Underlying: Maruti Suzuki Shares

Position: Short
Price per Share: Rs. 5,300 (Contract Price)
Lot size: 1 Contract = 100 Shares.
Initial Margin: 10%
Price of Maruti Suzuki Futures on Different dates:
Day Price/Share
1 5,400
2 5,200
3 4,900
4 4,800
5 4,700
6 4,900
7 5,000
8 5,100
9 5,200
10 5,700
Solution:

*10/100
= (5,300*100*2)10/100
= (10,60,000) *10/100
= 1,06,000
= 1,06,000*75/100
= 79,500
Margin Account
Settlement Daily Gain Cumulative Margin Account Margin Call
Day Price (Today’s Price Gain Balance (Depends on
(Market price – Previous (Today’s (Previous Day’s Margin a/c
of Future Day’s Gain+/-Previous Balance-/- Balance)
Contracts) Price)*Total Day’s Balance) Today’s Gain) (Initial Margin-
Quantity Today’s Balance)
1
2
3
4
5
6
7
8
9
10
Problem 6: Indices Futures: solve

Underlying: NIFTY
Position: Short

Initial Margin: 10%
Day NIFTY
1 9,400
2 9,000
3 8,500
4 8,200
5 7,600
6 8,900
7 9,800
Solution:

*10/100
= (9,100*30*3)10/100
= (8,19,000) *10/100
= Rs. 81,900
= 81,900*75/100
= Rs. 61,425
Settlement Daily Gain Cumulative Margin Margin Call

Day Price (Today’s Gain Account (Depends on
(NIFTY) Price – (Today’s Balance Margin a/c
Previous Gain+/-Previous (Previous Balance)
Day’s Day’s Balance) Day’s (Initial
Price)*Total Balance-/- Margin-
Quantity Today’s Today’s
Gain) Balance)
1
2
3
4
5
6
7
Index Futures Payoff

Problem-1
Solution:
Position: Short
Sold 200 NIFTY futures for 21,50,000
Value of NIFTY =21,50,000/200
= 10,750
Profit/Loss = (Previous Price – Today’s Price) *No. of Units
= (10,750-10,850) *200
= (-100) *200
Loss = 20,000
Problem 2
What if instead of selling, he has purchased?
Solution:
Position: Long
Value of 1 NIFTY Futures = 21,50,000/200
= 10,750
Profit/Loss = (Today’s Price – Previous Price) *No. of Units
= (10,850-10,750) *200
= 100*200
Profit = 20,000
Problem 3
Solution:
Position: Short
NIFTY on Previous Transaction/Value of 1 NIFTY = 20,20,000/200
= 10,100
Profit/Loss = (Previous Price – Today’s Price) *No. of Units
= (10,100-10,850)*200
= (-750)*200
Loss = 1,50,000
Problem 4: Solve
What if instead of selling, he has purchased?
Solution:
Stock Futures Payoff
Problem 1:
A trader entered in to 10 Futures contract to buy Infosys stocks. Each contract is for
delivery of 100 shares at Rs. 670 per share. On closing date price of Infosys Stocks
stood at Rs. 690 per share. Calculate the Payoffs.
Solution:
Payoff = (Today’s Price-Previous Price) *No. of Units Underlying
= (690-670) *1,000
= Rs. +20,000
Problem 2:
A trader sold 5 contracts of Sun Pharma for Rs. 458/Share. 1 Contract is for 200
Shares. Calculate the possible payoffs at any 5 Price levels of your choice.
Solution:
Assumed Price Levels:
P1: Rs. 430
P2: Rs. 435
P3: Rs. 450
P4: Rs. 470
P5: Rs. 490
Calculation of Payoff’s
Payoff = (Previous Price-Current Price) *No. of Units Underlying
At P1: (458-430) *1,000 = Rs. 28,000

At P2: (458-435) *1,000 = Rs. 23,000
At P3: (458-450) *1,000 = Rs. 8,000
At P4: (458-470) *1,000 = Rs. -12,000
At P5: (458-490) *1,000 = Rs. -32,000
Summing Up:
As the trader has taken short position, price over and above his Sale price will
give profits. Price below sale price will make trader to incur losses.
What if Amount in Margin Account is Withdrawn?

Amount from margin account can be withdrawn only in excess of Initial Margin. That
means, at point of time investors are not allowed to withdraw money below their
Initial Margin.

Underlying: Gold Position: Long
Price per gram: Rs. 4,500 (Contract Price) Lot size: 1 Contract = 10 Grams.
Initial Margin: 10%
Investor is allowed to withdraw amount in excess of initial margin. He makes withdrawal of

profits on the day of profit.
Date Price/Gram
04/05/2020 4,400
05/05/2020 4,550
06/05/2020 4,600
07/05/2020 4,450
08/05/2020 4,650
Solution for Problem 1: Gold Futures
Initial Margin = (Contract Price * No. of Units in 1 contract*No. of Contracts) *Margin

/100
= (4,500/Gram*10 Grams*2 Contracts) *10/100
= 90,000 * 10/100
= Rs. 9,000

= Rs. 9,000*75/100
= Rs. 6,750
Date Settlement Daily Gain Cumul Margin Margin Amou

Price (Today’s ative Account Call Withd
(Market Price – Gain Balance (Depends wa
price of Previous (Today’ (Previous on Margin (Balan
Future Day’s s Day’s a/c in
Contracts) Price)*Total Gain+/- Balance-/- Balance) Marg
Quantity Previous Today’s (Initial a/c
Day’s Gain) Margin- Initi
Balance) Today’s Marg
Balance)
4,500 ----- ----- 9,000 ----- ----
04/05/202 4,400 =4,400-4,500 =-2,000 =9,000- ----- -----
0 2,000
=-100 =7,000
=-100*20
=-2,000
05/05/202 4,550 =4,550-4,400 =3,000-2,000 =7,000+3,00 ----- =10,000
0 0 9,000
=+150*20 =+1,000 =10,000 =1,000
=+3,000 =10,000-
1,000
=9,000
06/05/202 4,600 =4,600-4,550 =+1,000+1,00 =9,000+1,00 ----- =10,000-
0 0 0 9,000
=+50*20 =2,000 =10,000 =1,000
=+1,000 =10,000-
1,000
=9,000
07/05/202 4,450 =4,450-4,600 =- =9,000- =9,000-
0 3,000+2,000 3,000 6,000
=-150*20 =-1,000 =6,000 =3,000
=-3,000 =6,000+3,00
0
9,000
08/05/202 4,650 =4,650-4,450 =+4,000- =9,000+4,00 ----- =13,000-
0 1,000 0 9,000
=+200*20 =+3,000 =13,000 =4,000
=+4,000 13,000-4,000
=9,000
Another method of Calculating profit in the above scenario is
= Total Cash Withdrawn-Margin Calls Deposited
= (1,000+1,000+4,000)-3,000
= +3,000 (Profit)
Problem 3: Indices Futures

Underlying: NIFTY
Position: Long
Initial Margin: 10%

Investor is allowed to withdraw amount in excess of initial margin. He makes
withdrawal of profits on the day of profit.
Day NIFTY
1 9,400
2 9,000
3 8,500
4 8,200
5 7,600
6 8,900
7 9,800
Solution for Problem 3: Indices Futures
Initial Margin = (Contract Price * No. of Units in 1 contract*No. of Contracts) *Margin/100

= (9,100*30*3)10/100
= (8,19,000)*10/100
= Rs. 81,900

= 81,900*75/100
= Rs. 61,425
Settleme Daily Cumulati Margin Margin Amount

Da nt Price Gain ve Gain Account Call Withdraw
y (NIFTY) (Today’s (Today’s Balance (Depends al (Balance
Price – Gain+/- (Previous on in Margin
Previous Previous Day’s Margin a/c- Initial
Day’s Day’s Balance-/ a/c Margin)
Price)*Tot Balance)
- Balance)
alQuantity
Today’s Gain) (Initial
Margin-
Today’s
Balance)
9,400 ----- ----- 81,900 -----
1 9,000 -36,000 -36,000 45,900 81,900- -----
45,900
45,900+36,00 =36,000
0
=81,900
2 8,500 -45,000 =-36,000- 36,900 81,900-
45,000 36,900
=-81,000 36,900+45,00 =45,000
0
=81,900
3 8,200 -27,000 =-27,000- 54,900 81,900-
81,000 54,900
=-1,08,000 54,900+27,00 =27,000
0
=81,900
4 7,600 -54,000 =-54,000- 27,900 81,900-
1,08,000 27,900
=-1,62,000 27,900+54,00 =54,000
0
=81,900
5 8,900 +1,17,000 1,62,000+1, = 1,98,900- ----- =1,98,900-
17,000 117,000 81900
=-45,000
=81,900 =1,17,000
6 9,800 +81,000 45,000+81,0 = 1,62,900 - ----- =1,62,900-
00 81,000 81900
=+36,000
= 81,900 = 81,000
Profit/Loss = Total Margin Withdrawal – Total Margin Call Deposited
= (1,17,000+81,000) – (36,000+45,000+27,000+54,000)
= 198,000-162,000
Profit = 36,000
Hedging:
It is used to reduce losses.
Example. 1:
A farmer growing sugar cane may expect a price fall. Then there is a risk. Hedge the
risk.
How to hedge?
Enter in to future contract at specified price so that the protection against price drop is
done.
Rs. 3,000/Quintal. His profits are locked.
If there is a chance of price increase. If the trend in market is bullish. There is no risk.
So no need to hedge.
Example. 2:
A manufacturer of Cloths need cotton, a raw material for manufacturing. There may be
a chance of price increase. If price increases, then there is a chance of loss. i.e. risk.
Rs. 1,000/Bale of Cotton. His losses are limited.
If there is a chance of price drop in future. That means there is no risk. No need to
hedge.
Problem 1 (Gold):
Day Spot/Cash Future
Price Contract Price
(Per Gram) Per Gram
Next Month
1 4,500 4,300
2 4,400 4,150
3 4,200 4,000
4 4,000 3,900
5 3,900 3,900
6 3,500 3,300
Short Hedge:
Long in Spot Market and Short in Futures Market
On Day 2:
Spot Market = 4,500-4,400 = +100
Profit/Loss in Spot Market = 4,400-4,500 = -100
Short Position in Futures Market on Day 2 at Rs. 4,150
Net Profit on this Trade:

On Day 5:
Profits or Gains in Spot Market
P/L= 3,900-4,500
Loss= -600
Profits or Gains in Futures Market:

= 4,150 -3,900
= +250
600/250
He has to take short position in Futures Market for 2.4 Grams of Gold
= +250*2.4
= +600
Concluding:
If a trader takes long Position in Spot Market for 1 Gram of Gold at Rs. 4,500/Gram. If
Price starts falling, then he has to take short position in Futures market.
If Short position in futures market is taken on Day 2 at Rs. 4,150/Gram, then the trader
has to take short position for 2.4 Grams of Gold.
Problems on Hedging
Hedge Ratio or Beta(β):

Ratio used for computing optimal number of contracts.
Optimal Number of Contracts:

No. of contracts to be traded for making losses to zero.
Formulas:
Hedge Ratio or Beta (β):
=(n ∑ XY )−¿ ¿
Optimal Number of Contracts:

QA
= β* QF
QA = Total Quantity underlying
QF = No. of Quantity in one Contract
Steps in Computation:
1. Compute X (Today’s Price – Previous Price of Futures Contract)
2. Compute Y (Today’s Price – Previous Price in Spot Market)
3. Compute X2
4. Compute Y2
5. Compute XY
6. Take Total of all columns
7. Apply Hedge Ratio Formula
8. Apply Optimal Number of Contracts Formula
Problem 1:
From the following Information, Compute Optimal Number of Contracts to be traded.
Spot Price Future Price
603 617.2
609 619.5
601 603.2
587 599.0
598 608.4
596 597.1
612 621.7
616 623.3
623 621.8
614 622.4
620 627.8
615 623.7
621 629.2
618 627.2
627 628.1
624 629.2
630 639.3
Total Traded Quantity in Spot Market = 1,200 units

No. of Units in one contract in Futures Market = 100
Solution:
X Y X2 Y2 XY
(Difference of (Difference of
Future Prices) Spot Prices)
+2.3 +6 5.29 36 13.8
-16.3 -8 265.69 64 130.4
-4.2 -14 17.64 196 58.8
+9.4 +11 88.36 121 103.4
-11.3 -2 127.69 4 22.6
+24.6 +16 605.16 256 393.6
+1.6 +4 2.56 16 6.4
-1.5 +7 2.25 49 -10.5
+0.6 -9 0.36 81 -5.4
+5.4 +6 29.16 36 32.4
-4.1 -5 16.81 25 20.5
+5.5 +6 30.25 36 33
-2.0 -3 4 9 6
+0.9 +9 0.81 81 8.1
+1.1 -3 1.21 9 -3.3
+10.1 +6 102.01 36 60.6
∑ X =+22.1 ∑ Y =27 ∑ 2=1,299.25 ∑ 2= ∑ XY = 870.4
X Y
Hedge Ration or Beta (β)=(n ∑ XY )−¿ ¿
=(16 ∑ 870.4)−¿ ¿
13,926.4−596.7
=
20,788−488.41
13,329.7
=
20,299.59
= 0.6566
QA
Optimal Number of Contracts = β* QF
1,200
= 0.6566* 100
= 7.8792 Contracts i.e 8 Contracts.
Adjusting the Change in Spot Price to Future Price or Change in Future price due to change in Spot
Price
Change∈Spot Price
=
Beta ( β )
Continuation to above Problem

Spot Price is ₹604/Unit
Future Price is ₹660/Unit
Expected Change in Spot Price is ₹9
Find out the result of hedging. (Both Long Hedge and Short Hedge)
Solution:
Long Hedge (Short in Spot Market and Long Position in Futures Market)
If, there is a Price Increase by ₹9:
Change∈Spot Price
= Beta ( β )
=9/0.6566
= +13.707
Payoff in Spot Market = (9)*1,200
Loss = 10,800
Payoff in Futures Market = (13.707)*7.8792*100

Profit = 10,800
If, there is a Price Decrease by ₹9:

Change∈Spot Price
Change in Future Price= Beta ( β )
=-9/0.6566
= -13.707
Payoff in Spot Market = (9)*1,200
Profit = -10,800
Payoff in Futures Market = (13.707)*7.8792*100

Loss = -10,800
Short Hedge (Long in Spot Market and Short in Futures Market)

If Price Increase by ₹9
Change∈Spot Price
= Beta ( β )
=9/0.6566
= +13.707
Payoff in Spot Market = 9*1,200
Profit = 10,800
Payoff in Futures Market = 13.707*7.8792

Loss= 10,800
If Price Decrease by ₹ 9
Change∈Spot Price
= Beta ( β )
=-9/0.6566
= -13.707
Payoff in Spot Market = -9*1,200
Loss = 10,800
Payoff in Futures Market = 13.707*7.8792

Profit = 10,800
Problem 2:
From the following Information Find out the result of Long Hedging.
Day Future Price Spot Price

1 20 22
2 25 26
3 26 29
4 28 30
5 29 35
6 30 36
7 31 37
A trader is willing to go for trading in following prices.

Total Underlying: 500 Units
Contract Size: 50 Units in each Contract
Spot Price: ₹25
Future Price: ₹ 28
Expected Change in Price is ₹+3
Solution:
Day X Y X2 XY
(Changes in (Changes in
Future Price) Spot Price)
2 5 4 25 20
3 1 3 1 3
4 2 1 4 2
5 1 5 1 5
6 1 1 1 1
7 1 1 1 1
n=6 ∑ X =+11 ∑ Y =+15 ∑ X 2=+33 ∑ XY =+32
Hedge Ration or Beta (β)=(n ∑ XY )−¿ ¿
6(32)−(11∗15)
=
( 6∗33 )−¿¿
192−165
=
198−121
=0.3506
QA
Optimal Number of Contracts = β* QF
500
= 0.3506* 50
= 3.506 i.e. in reality 4 Contracts
Computation of Payoffs in Long Hedging (Short in Spot and Long in future)

Change∈Spot Price
Change in Future Price = Beta ( β )
+3
= 0.3506
Change in Future Price = 8.5567 which means an Increase of ₹3 in Spot Market will
lead to Increase in ₹8.5567 in Future Market.
Payoff in Spot Market:

= +3*500Units
Loss = 1,500
Payoff Futures Market:
= 8.5567*3.506*50
Profit = ₹14,99.98 i.e. 1,500
Conclusion:
Loss of ₹1,500 in Spot market is Recovered by Profits in Futures Market of
₹1,500 making the net Payoff Nil or No Profit No Loss.
Portfolio Beta (β) or Portfolio Hedge Ratio:
Steps in Computation of Portfolio Beta (β) or Portfolio Hedge Ratio

1. Calculate Value of investment in each security.
2. Calculate Weight (wi)
3. Calculate β*wi
Problem 1:
An Investor owns the 3 securities. Details are as under:
Security No. of Shares Price/Share (₹) Security Beta
A 15,000 40 1.2
B 25,000 20 1.8
C 15,000 60 0.8
Find out the portfolio Beta ( β ).
Solution:
Security Value (No. of Weight Security Portfolio
Shares*Price/Share (wi) Beta Beta (β*wi )
)
A 6,00,000 6,00,000/20,00,000 1.2 0.36
=0.30
B 5,00,000 5,00,000/20,00,000 1.8 0.45
=0.25
C 9,00,000 9,00,000/20,00,000 0.8 0.36
=0.45
Total 20,00,000 1 1.17
Problem 2:Solve
An Investor owns the 5 securities. Details are as under:
Security No. of Shares Price/Share (₹) Security Beta
1 10,000 75 1.1
2 18,000 44 1.7
3 24,000 35 0.9
4 9,000 105 0.6
5 25,000 25 1.3
Find out the portfolio Beta ( β ).
Solution:

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Derivatives

If Gold Price on 25/04/2020 hits Rs. 5,000/Gram.

Total 5,000*10grams = Rs. 50,000

Rs. 6,000 for me and Rs. 40,000 for Kalyan Jewelers

=Rs. 6,000+Rs.40,000= Rs. 46,000

Find profit for Person 3 if Gold Price On 25/04/2020 is

S1: Rs. 4,500/Gram =

S2: Rs. 4,000/Gram =

S3: Rs. 5,000/Gram =

Also find the Profit or Loss for You

Option 5: Keep advance payment slip (loss of Rs. 5,000)

Farmer 1 500 Kgs of Wheat BM 1

Farmer 1 500 Kgs of Wheat BM 1

Delivery Date: After 3 Months

take delivery of wheat and Payment.

Option 3: Farmer may fail to deliver 500Kg’s of Wheat whereas BM is willing

to buy at Rs. 20,000.

If Farmer is not able to deliver:

Option 4: Arrange the delivery of 500Kg’s of Wheat from Farmer 2.

If B M is not able to take delivery:

Option 7: Transfer the contract to BM 2 to take delivery of 500 Kg’s of Wheat.

Settlement of Futures contract

Underlying: MRF Shares

Market Lot: 1 Contract i.e. 100 Shares

Contract Date: 22/04/2020

Expiry Date: 30/04/2020

Contract Price: Rs. 66,000/Share

Margin (10%): Rs. 6,600/Share

Value of Transaction: 66,000*100 = 66,00,000

Total Margin Payable: 6,600*100 = 6,60,000

Date Contract Margin Position Profit/Loss

Overall Profit: 300/Share*100 = 3,00,000

Pay: Rs. 6,60,000

Receive: Rs. 6,90,000

Profit =Amount Received-Amount Paid

Date Contract Margin Position Profit/Loss Overall Profit

Profits/Loss is purely based on Spot price of MRF Shares in BSE /NSE

Spot Price: 30/04/2020 in BSE Rs. 63,000/Share

Through Contract = Rs. 66,000/Share

Notional Profit/Loss: = Price Difference in Spot Market and Futures Market

= - 3,000/Share i.e. Loss

Overall P/L = -3,000*100

Spot Price: 30/04/2020 in BSE Rs. 68,000/Share

Through Contract = Rs. 66,000/Share

Notional Profit/Loss = Price Difference in Spot Market and Futures Market

= +2,000/Share i.e. Profit

Overall P/L= 2,000*100

Market Lot: 1 Contract i.e. 100 Shares

Contract Date: 22/04/2020

Expiry Date: 30/04/2020

Current Market Price: Rs. 68,000/Share

Contract Price: Rs. 66,000/Share

Margin (10%): Rs. 6,600/Share

Value of Transaction: 66,000*100=66,00,000

Total Margin Payable: 6,600*100=6,60,000

Date Contract Margin Position Profit/Loss

Pay: Rs. 6,60,000

Receive: Rs. 6,90,000

Profit =Amount Received-Amount Paid

Date Contract Margin Position Profit/Loss Overall Profit

Spot Price: 30/04/2020 in BSE Rs. 63,000/Share

Through Contract = Rs. 66,000/Share

= Price Difference in Spot Market and Futures Market

= - 3,000/Share i.e. Loss

Initial Margin = (Contract Price * No. of Units in 1 contractNo. of Contracts)