Roll Number: - JL19PG034

Name: - Ashwani Jaiswal

Batch: - 2019-2021

Trimester: - Third

Course Code: -

Couse Title: - Advance Corporate Finance

Date: - 10/4/2020

Day: - Friday

Start Time: - 9.00 AM

 Answer no: - 4 a

The major risk of spot market for Beta India limited is value of Yuan will exceed and value of
rupee may decline which means Yuan will may appreciate and value of rupee may depreciate.

 If Yuan gets appreciate or rupee gets depriciate which means value of Yuan may exceed,
then Beta India limited must pay more rupees for same number of Yuan and this will not
be beneficial for Beta India limited.
 If beta limited want to retain risk and decrease their expenditure then they will buy call
option and sell put option in this way Beta limited can decrease its risk as when they buy
call option, they will set a target that they will not purchase if its value come down to Rs
10.95. and by selling put option they will make ensure that they buy Yuan at or under
Rs10.25.
 If prices of yuan will not exceed more than Rs 10.95 or there is small increment in value
of Yuan, then this will result in increasing expenditure as their call option will not be of
any use.

Answer 4 b
Use of Strategy A
For this strategy we will buy Call option
The condition for using call option for buyer is St>=K
1 Yuan =Rs 10.95 and Rs 0.25 is call premium
St >= Rs 10.95
-St
(St-k)
Here k= Rs 10.95 and call premium is Rs0.25
So, St -10.95= 10.95 and pay off including premium will be Rs 10.95-0.25 = Rs 10.7
Advantages of using call option
 If we buy call option, we will limit our losses as they will be not more than Rs 0.5 and this will
strategy benefit us, if there is large increment in value of Yuan.
 This strategy helps us as our maximum loss including premium will be not more than 0.5 Rs.
Disadvantage of using call option

 If there is smaller increment in value of yuan like it come to 10.75 to 10.85 from then this
strategy will give us huge loses as we had bought call option of Rs 10.95 and if Yuan prices will
be lower than 10.95 then we will face losses

Answer no: - 4 c

Use of Strategy A

For this strategy we will sell Put option

The condition for using put option for seller is St<=K

1Yuan =Rs 10.25 and Rs 0.25 is put premium that we will get.

St<=10.25

-St

-(k-St)

Here- k= Rs 10.25, and put premium which we receive is Rs 0.25

So, -10.25+ St= -10.25 and payoff including premium here will be Rs -10.25 +0.25= -Rs 10

Advantages of using put option

 If we will sell put option, we will limit our profit as it will be not more than Rs 0.75
including premium and by this way we will limit our gain, as whatever will decline in
value of dollar our profit will not be more than Rs 0.75 each Yuan.

Disadvantage of using put option

 If there is larger decline in value of dollar like if dollar comes from Rs10.75 to 9.75 then
this strategy will not be that much beneficial as we will already sell our put option at Rs
10.25.
 Answer No: -4 d
Use of strategy C
For this strategy we Buy call option and Sell Put option
The condition for using call option for buyer is St>K
1 Yuan =Rs 10.95 and Rs 0.25 is call premium
St >= Rs 10.95
-St
(St-k)
Here k= Rs 10.95 and call premium is Rs0.25

The condition for using put option for seller is St<K

1Yuan =Rs 10.25 and Rs 0.25 is put premium that we will get.

St<=10.25

-St

-(k-St)

Here- k= Rs 10.25, and put premium which we receive is Rs 0.25

So, -10.25+ St= -10.25

Here payoff including premium here will be Rs 10.95-0.25+0.25=10.95 and Rs -10.25 +0.25-
0.25

= Rs -10.25

Advantages of using put and call option

 If we use this strategy, then we will maximize our losses as well as limit our earning as
our losses we will not be more than Rs 0.05 and our profit will be not more than Rs 0.50.
 This strategy is called caller strategy and by this strategy we will set a range from Rs
10.25 to Rs 10.75.

Disadvantage of using put and call option

  If we use this strategy our losses as well as benefits both will get fixed and profits and
loss both will be less than if we use put and call option individually.

Answer No: - 4 e
Beta India limited want to get 1 yuan=Rs 10.75

For this Beta India limited should go for Strategy A that is buying call option ST>= 10.95 (caller
strategy) in this way Beta India limited will fix its purchasing price of Yuan and losses will not
exceed Rs 0.5 including premium and Yuan prices will also not exceed Rs 11.