JL19PG022

AMAN SRIVASTAVA
3RD TRIMESTER
FIN301
ACF
06/03/2020
MONDAY
9 A.M
Answer 4 a)

Here Beta Ltd. has to pay for its orders, so the risk for Beta Ltd. In the spot market is that Rupee can
depreciate against Chinese Yuan. Since B Ltd wants to retain the risk of spot market there can be two
possibilities-

1) The Rupee appreciates against Yuan, than the expenditure of Beta Ltd. Will decrease. For
example, in this case for 1-unit appreciation in Rupee (against Yuan) the expenditure of Beta
Ltd will decrease by 10 million Rupees.
2) If Rupee depreciates against Yuvan than the expendiature will increase. For example taken in
first case, 1-unit depreciation in Rupee (against Yuan) the expenditure of Beta Ltd will
increase by 10 million Rupees.

Answer 4 b)

In this case we have to purchase call option because it is a bullish strategy i.e. it will hedge risk
associated with depreciation of Rupee.

Spot price (St) St

Strike price (K) 10.95
Premium (C) .25

St<=10.95 St>10.95
Spot price -St -St
Call purchase 0 St-10.95
Pay off -St -10.95
Pay off including premium (-.25) St-.25 -11.20

This strategy if good if Rupee depreciates by large amount because in this upper limit is fixed
(-11.20). If Rupee appreciates than we will get the spot price excluding premium.

Answer 4c)

In this case we have to sell the put option to hedge the risk

Spot price (St) St

Strike price (K) 10.25
Premium (C) .25
 S<=10.25 S>10.25
Spot price -St -St
Put purchase -(10.25-St) 0
Pay off -10.25 -St
Pay off including premium -10 -St+.25
(+.25)

Answer 4d)

Spot price (St) St

Strike price (K) 1.025 & 10.95

Premium (C) .25

St<10.25 10.25<St<=10.95 St>10.95

Spot price -St -St -St
Put purchase -(10.25- St) 0 0
Call written 0 0 St-10.95
Pay off -10.25 -St -10.95
Pay off including premium -10.25 -St -10.95
(+.25 & -.25)

Answer 4e)

In this case we would be using purchase-call option because it will fix the Rupee
depreciation limit.