1

Suggested Solution
Test-5

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 2

MCQ-1
(a) Ans (ii) decrease by 1.1%
Expected return under present portfolio (Using CAPM):
= 𝑅𝑓 + 𝛽 (𝑅𝑚 − 𝑅𝑓 ) = 6 + 1.30(10 – 6) = 11.20%

Expected return under suggested portfolio (Using CAPM):

= 𝑅𝑓 + 𝛽 (𝑅𝑚 − 𝑅𝑓 ) = 6 + 1.025* (10 – 6) = 10.10%

*1.5 × 0.20 + 0.5 × 0.30 + 1.25 × 0.40 + 0.75 × 0.10 = 1.025

His portfolio expected return will decrease by 1.1% (11.2% – 10.1%)

(b) Ans (ii) -5.05% & -2.7125%

When market return is negative 2.5%
Expected return under present portfolio (Using CAPM):
= 𝑅𝑓 + 𝛽 (𝑅𝑚 − 𝑅𝑓 ) = 6 + 1.30(-2.5 – 6) = - 5.05%

Expected return under suggested portfolio (Using CAPM):

= 𝑅𝑓 + 𝛽 (𝑅𝑚 − 𝑅𝑓 ) = 6 + 1.025(-2.5 – 6) = - 2.7125%

(c) Ans (ii) 1 & 2

MCQ – 2
(a) ANS (iii) 49.256 & 19.555
(b) ANS (ii) 4500.744 & 340.445
(c) ANS (iii) 4707.91 & 356.126
(d) ANS (ii) Fut Price lesser than 4707.91

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3 Suggested Solution-Test-5

Hint:
(i) Calculation of theoretical forward prices & recommended action:
Particulars Security A Security B
(a) Calculation of PV of 𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝐸𝑥𝑝𝑒𝑐𝑡𝑒𝑑 𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝐸𝑥𝑝𝑒𝑐𝑡𝑒𝑑
expected dividend 𝑒 𝑟𝑡 𝑒 𝑟𝑡
50 20
= 0.09×0.1667 = 49.256
= = 19.555
𝑒 𝑒 0.09×0.25

(b) Adjusted Spot Price:

Spot price 4550 360
(-) PV of dividend (49.2551) (19.555)
Adjusted Spot Price 4500.744 340.445

(c) Theoretical forward Adjusted SP × 𝑒 𝑟𝑡 Adjusted SP × 𝑒 𝑟𝑡

price = 4500.744 × 𝑒 0.09×0.5 = 340.445 × 𝑒 0.09×0.5
= 4707.91 = 356.126
Recommended Action Sell spot. Buy Future Buy spot. Sell Future

(d) Condition when said Future is less than Future is more than
action to be taken ₹4707.91. ₹356.126.

(ii) If there is no dividend expected:

Particulars Security A Security B
Adjusted spot price 4,550 360
Theoretical forward Adjusted SP × 𝑒 𝑟𝑡 Adjusted SP × 𝑒 𝑟𝑡
price = 4550 × 1.04603 = 360 × 1.04603
= 4550 × 𝑒 0.09×0.5 = 360 × 𝑒 0.09×0.5
= 4759.4 = 376.57
Condition when said Future is less than Future is more than
action to be taken ₹4759.4 ₹376.57

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 4

MCQ – 3
Ans: (B) Theta
"theta" refers to the rate of decline in the value of an option due to the
passage of time. It can also be referred to as the time decay of an option.

MCQ – 4
Ans: (D) 6,08,100

Interest rate p.a. = 10% (annual compounding)

Per Period length =2y
Effective interest rate per period = (1.10)2 – 1 = 1.21 – 1 = 0.21 = 21%
∴ r = 21% & n = 10

PV = 1,50,000 × PVIFA (21%,10) = 1,50,000 × 4.054 = 6,08,100

MCQ-5
Ans: (A) The rho of a put option

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 5 Suggested Solution-Test-5

Question-2

AUD $ 15,70,000 (10–July) [1m]

XYZ Ltd.
AUD $ 9,25,000 (10-Sept) [3m]
US $ AUD$ (Buy)
Bank / Exchange

SR (10-June): AUD$ 1 = US $ 0.8684 / 0.8688

Option:
Underlying currency = AUD$
Lot Size = AUD$ 100,000
Premium should be payable in $ or Cents
(In question premiums are given in Cents)

• 1m option strike = 0.87 for Call

Call premium = 1.05 cent

• 3m option strike = 0.88 for Call

Call premium = 1.65 cent

• As underlying in AUD $, American firm has to buy Call

Option

(A) For Payable on 10-July (i.e. 1M):

(i) Forward Contract:
AUD $ = $ 0.8601
AUD$ 15,70,000 = $ (0.8601 × 15,70,000) = $ 13,50,357

(ii) Option Contract:

Strike = $ 0.87

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 6

Value of 1 contract = AUD$ 100,000

AUD$ 15,70,000
No. of contract = = 15.70
AUD$ 100,000
[ i.e.,15 Contract]

(a) Premium payable for 15 contracts

= (1.05 × 100,000) × 15 contracts
= 15,75,000 cents = $ 15,750 [100 cents = $1]

(b) On Expiry
Assume Call option is beneficial to exercise.
Applicable rate to buy AUD$ = $ 0.87

Can$ to be bought in 15 contracts

= (100,000 × 15) = AUD$ 15,00,000

Amount payable to buy it = $ (0.87 × 15,00,000)

= $ 13,05,000

(c) Shortage = AUD$ 15,70,000

- AUD$ 15,00,000
AUD$ 70,000

Buy it at 1m forward rate

AUD$ 1 = $ 0.8601
AUD$ 70,000 = (0.8601 × 70,000) = $ 60,207

(d) Total outflow under option contract

= Premium + Contract amount + Shortage
= $ 15,750 + $ 13,05,000 + $ 60,207
= $ 13,80,957
Advice: Forward Contract is beneficial due to lower outflow

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7 Suggested Solution-Test-5

(B) For Payable on 30-Sept (i.e. 3M):

(i) Forward Contract:
= $ (0.8656 × 9,25,000) = $ 800,680

(ii) Option Contract:

AUD$ 9,25,000
No. of contract = = 9.25
AUD$ 100,000
[ i.e., 9 Contract]

(a) Premium payable for 9 contracts

= (1.65 × 100,000) × 9 contracts
= 14,85,000 cents = $ 14,850 [100 cents = $1]

(b) On Expiry:
AUD$ to be bought in 9 contracts
= (100,000 × 9) = AUD$ 900,000
Amount payable to buy it = $ (0.88 × 900,000) = $ 792,000

(c) Shortage = AUD$ 9,25,000

- AUD$ 9,00,000
AUD$ 25,000

Buy it at 3m forward rate

AUD$ 1 = $ 0.8656
AUD$ 25,000 = (0.8656 × 25,000) = $ 21,640

(d) Total outflow under option contract

= Premium + Contract amount + Shortage
= $ 14,850 + $ 7,92,000 + $ 21,640 = $ 8,28,490

Advice: Forward Contract is beneficial due to lower outflow.

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 8

QUESTION -3 Solution

Calculation of NAV on 1 st march,2024

 in Lakh
Stock A Ltd 100 L + (15% x 1) 115
T Ltd 100 L + (15% x 1.5) 1225
N Ltd 450 L + (15% x 2) 585
S Ltd 50 L – (15% x 0.5) 46.25
1971.25
Cash & Bank Balance 100
2071.25

2071.25 Lakh
NAV = =  2012.07
1,00,000 + 2941.1765

Calculation of Net gain (Loss)

Calculation of Net ain(Loss) 

Sale price  2012.07

Less:- Buy price  1700
Exist Load @1%  20.1207
 291.9493

Total Gain on 2941.1765 units  8,58,674.420

Less:- STCG @15% 128,801
Net Gain 729,873.42

Working Notes:-

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 9 Suggested Solution-Test-5

Mutual fund
(i) Position of Mr. x on 1 st Feb, 2024
Calculation of NAV on 1 st Feb,2024
Stock  in Lakh
A Ltd 100
T Ltd 1000
N Ltd 450
S Ltd 50
1600
Cash & Bank Balance 100
1700

17,00,00,000
NAV = =  1700
1,00,000
50,00,000
Mr. X invested 50 Lakh unit allotted = = 2941.1765
1700

23,000−20,000
(ii) Change in Market (NIFTY 50) = x 100 = 15%
20,000

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 10

QUESTION – 4 Solution
(i) When yield falls, price of bond increases as yield has inverse relation
with price.
(ii) Component of interest and principal:
(a) 5 year Bond:
Price of Bond @ 10% (RR)
= 100 x PVIFA (10%, 5) + 1000 X PVIF (10%, 5)
∵ AI = 1000 x 10%(Coupon) = 100
= (100 x 3.7907) + (1000 x 0.6209)
= 379.07 + 620.9 = 999.97 i.e., 1000

Note: When current price and face value both are same then coupon
rate itself is Required return.

Price of Bond @ 8% (RR)

= 100 x PVIFA (8%, 5) + 1000 X PVIF (8%, 5)
∵ AI = 1000 x 10%(Coupon) = 1000
= (100 x 3.9927) + (1000 x 0.6806) = 399.27 + 680.60
= 1079.87 i.e., 1080

Increase in Bond price = 1080- 1000 = 80

Due to interest (%) = ? Due to principal (%) = ?

Interest portion in above increase = (399 – 379.07) = 19.93

Principal portion in above increase = (681 – 620.90) = 60.10
19.93
% increase due to interest = x 100 = 24.91%
80
60.10
% increase due to principal = x 100 = 75.09%
80

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11 Suggested Solution-Test-5
Cross check = 24.91 + 75.09 = 100%
Disclaimer:
ICAI solution’s verification fails due to wrong rounding off.
Price  Rounded to nearest whole number
Interest & principal  Not rounded off

(b) 20 years Bond:

Price of Bond @ 10% (RR)
= 100 x PVIFA (10%, 20) + 1000 X PVIF (10%, 20)
∵ AI = 1000 x 10%(Coupon) = 100
= (100 x 8.5136) + (1000 x 0.1486)
= 851.36 + 148.60 = 999.96 i.e., 1000

Price of Bond @ 8% (RR)

= 100 x PVIFA (8%, 5) + 1000 X PVIF (8%, 5)
∵ AI = 1000 x 10%(Coupon) = 100
= (100 x 9.8181) + (1000 x 0.2145)
= 981.81 + 214.50 = 1196.31 i.e., 1196

Increase in Bond Price = 1196- 1000 = 196

Due to interest (%) = ? Due to principal (%) = ?

Interest portion in above increase = (982 – 851.36) = 130.64

Principal portion in above increase = (214.5 – 149 ) = 65.36
130.64
% increase due to interest = x 100 = 66.65%
196
65.36
% increase due to principal = x 100 = 33.35%
196

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 12

Question 5 Solution

K = $900 Annual Dy = 0.30 × 12 = 3.6%

SP = $930
𝜎 = 20% p.a.

SP σ2
Ln ( )+ [(Rf −Dy) + ] × T
K 2
(i) d1 =
σ × √T

930 (.20)2
Ln ( )+ [(.08−.036) + ] × 2/12
900 2
=
.20 × √2/12
Ln (1.0333) + 0.010667
=
0.0816
0.03275 + 0.010667
= =0.53
0.0816

(ii) d2 = d1 - σ × √T = 0.53 – 0.0816 = 0.45

(iii) N(d1) = N (0.53) = 0.7019
N(d2) = N (0.45) = 0.6736
(iv) EDSP SP 930 930 930
= Dy.t = 2 = 0.06 = = 924.43
e 0.036 × e 1.00602
e 12

Requirement:
(a) Call Option value:
C0 = [EDSP × N(d1 )] − [PV of Strike × N(d2 )]
900
= (924.43 × .7019) –( − .6736 )
0.08 × 2
e 12
900
= 648.857 - ( 0.01333 − .6736 )
e
900
= 648.857 - ( − .6736 ) = 50.65
1.01342

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 13 Suggested Solution-Test-5

Question 6 Solution
Risk Neutral Method:
0m 3m
12% p.a.

HP = 27300
SP = 26000
Strike Price = 26000 LP = 24700
Call Premium = 1010

(i) Probability of attaining High Price 500

3
SP × (1+ .12 × )−LP 26000 × 1.03 −24700
=
12 = = 0.8
HP−LP 27300−24700
(ii) Probability of attaining LP = 1 – 0.80 = 0.20
(iii) Payoff at 3m:
MP Strike Action Payoff Probability Average
27300 26000 Exercise 1300 0.80 1040
24700 26000 Lapse 0 0.20 0
1040

1040
(iv) Call premium (fair) = 3 = 1009.71 [Rounded to 1010]
(1+ .12 × )
12

Binomial method:
0m 3m
12% p.a. Payoff

HP = 27300 1300
SP = 26000
LP = 24700 0

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 14

1300 − 0
(i) Hedge ratio = = 0.50 shares
27300 −24700

(ii) Hedge portfolio value on expiry (i.e., value of 0.50 shares & 1 short call)

HP = 27300 LP = 24700
Value of 0.50 share 27300 × 0.50 = 13,650 24700 × 0.50 = 12,350
Less: payoff payable 1300 0

Net value 12,350 12,350

12,350
(iii) PV of hedge portfolio = 3 = 11,990.29
(1+ .12 × )
12

(iv) Fund required to create that hedged portfolio today (i.e., to buy 0.50
shares) = 26000 × 0.50 = 13000

(v) Premium to be charged from call holder = 13000 – 11990.29 = 1009.71

Hence, fair premium = 1009.71 ≈ 1010

As fair call option premium is same as actual premium (1010), we can

say it is justified.

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