1.

As an equity fund manager, you see that the value of the BSE 30 Sensex Index is 17,000 and the
value of the equity portfolio owned by the fund is INR 1,000,000 on January 1. The risk-free
interest rate is 8%, the dividend yield on the index is 3%, and the beta of the portfolio is 1.25.
Assume that an index futures contract on BSE 30 Sensex with a four-month maturity will be used
to hedge the portfolio value over the next three months and one futures contract is for the
delivery of 15 times the value of the index
Ans

4 month 3 month
120 90 30

step1 The current futures price should be:

F = S × e(r–d)T
= 17,000 × e(0.08–0.03)(120/365) = INR 17,281.76
Step2 The value of the futures contract will be:
F × 15 = INR 259,226.42
Step 3 The number of futures contracts to take a short position in for the hedge is given by:
N = b × S/F = 1.25 × 1,000,000/259,226.42 = 4.82 ≈ 5
Step 4 Then the futures price after 90 days, when the hedge will be removed is:
F = S × e(r–d)T = 16,000 × e(0.08–0.03)(30/365) = 16,198.48
contract value 16,198.48*15 = 242976.9
step 5 profit (sp- cp)*15*5
(17281.76-16198.48)*15*5 = 81246
Step 6 cash segment
Rf =8*90/360 =1.97 here 90come from (120-30)
Dividend 3*90/365 = 0.74
RM = closing – opening = 16000-17000
Opening 17000

= -5.88% + 0.74 (dividend)

= -5.14%

Rf +b(RM-Rf) = 1.97+1.25(-5.14-1.97) = -7.255%

Convt (-0.0725)

Step 7 calculate the value of stock portfolio

Value = 1000,000*(1-0.0725) = 927450

Step 8 hedge ratio = 927450+81246 =1008696

Step 9 = 1008696-1000000 =8696

2. Ramesh, the fund manager of Accufunds, observes that the value of the NSE CNX50 index is at
4,600 on March 5, and the value of the equity portfolio owned by the fund is INR 50,000,000 on
March 5. He can borrow at the riskfree interest rate of 9%. He estimates that the dividend yield
on the index is 2% and the beta of the portfolio 1.4. He wants to hedge his equity portfolio with
futures until April 15. He finds that CNX50 futures are available with expiry on April 28 with a
contract multiplier of 50.
March 5 – april 15- april 28

March 5 – april 28 March 5 – april 15

March 27 March 27 55-42 =13
April 28 April 15
55 42

step1 The current futures price should be:

F = S × e(r–d)T
= 4600× e(0.09–0.02)(55/365) = 4,648.7773
Step2 The value of the futures contract will be:
F × 50 = 4,648.7773 *50 =232439
Step 3 The number of futures contracts to take a short position in for the hedge is given by:
N = b × S/F = 1.4 × 50,000,000 /232439
= 301 contract
Step 4 Then the futures price after , when the hedge will be removed is:
F = S × e(r–d)T = 4450 × e(0.09–0.02)(13/365) = 4,461.96
contract value 4,461.96 × 50 = INR 223,098
step 5 profit (sp- cp)* 50 × 301
(4,648.7773 – 4,461.96) × 50 × 301 = 2,811,541
Step 6 cash segment
Rf =9*42/360 =1.05 Dividend 2*42/365 = 0.23
RM = closing – opening = 4450-4600 =(-0.032) 3.20
Opening 4600
= -3.20% + 0.23 (dividend)
= 0.297%
Rf +b(RM-Rf) = 1.04% + 1.4 × (–3.05% – 1.04%) = –4.686%
Step 7 calculate the value of stock portfolio
Value = 50,000,000 × [1 –4.686%] = INR 47,657,000
Step 8 hedge ratio = 47657000+2811541 = 50468541
Step 9 = 50468541 -50,000,000 =468541
1. ABC Fund has a portfolio worth INR 100 million. The risk-free interest rate is 6%. The dividend
yield on the S&P CNX Nifty index is 2%. The beta of this portfolio is 1.2. The S&P CNX Nifty
index is at 5,600 points on July 1, and there is a futures contract available on the S&P CNX
Nifty index with maturity in three months. You want to hedge the value of this portfolio at the
end of two months using the S&P CNX index futures. The contract multiplier for the S&P CNX
Nifty index futures is 50. 
i) Explain how you would hedge the value of the portfolio using futures.

ii) If the S&P CNX Nifty index after 60 days is 5,950 points, what would be the value of the
hedged portfolio after 60 days?

3 month and 2 month

r F=6 % Dividend yield at d=2%beta=1.2

3 month 2 month
90 60 90-60=30

step1 The current futures price should be:

F = S × e(r–d)T
= 5600 × e(0.06–0.02)(90/365) = 5655.5061
Step2 The value of the futures contract will be:
F × 50 = 5655.5061*50 =282775
Step 3 The number of futures contracts to take a short position in for the hedge is given by:
N = b × S/F =
1.2∗100,000,000
= 424 contract
282,775
Step 4 Then the futures price after , when the hedge will be removed is:
F = S × e(r–d)T = 5,950 × e(0.06–0.02)(30/365) = 5969.5938
contract value 5969.5938 × 50 = 298479.69
step 5 profit (sp- cp)* 50 × 424
(5655.5061 – 5969.5938) × 50 × 424 = -6658659.24
Step 6 cash segment
Rf =6*60/365 =0.99 Dividend 2*60/365 = 0.33
RM = closing – opening = 5950 -5600 = 0.0625 or 6.25
Opening 5600
= -3.20% + 0.23 (dividend)
= 0.297%
Rf +b(RM-Rf) =

1 %+1.2 6.58 %−1 %

[ ¿ 7.696 ]
= –4.686%
Step 7 calculate the value of stock portfolio
Value = 100,000,000 ( 1+ 7.696 % )=107696000
Step 8 hedge ratio = 107696000+(-6658659.24) =
¿ 1010,37,292
Step 9 = 101037292−100,000,000=1037292