6.

Derivatives Analysis & Valuation (Futures)

Study Session 6
SOLUTION 1A

Step 1 : Computation of Profit/Loss on Share of X Ltd

1Purchase Price : 10,000 x 22 -220000
Sale Price : 10,000 x (22 - 22 x 2%) +215600
Loss 4400
Step 2 : Computation of Profit/Loss on Nifty
Sale Price: 400 x 1100 +440000
Purchase Price: 400 x (1100- 1100 x 1.5%) -433400
Profit 6600
Step 3 : Computation of Overall Profit and Loss in
Profit on Nifty 6600
Loss on X Ltd. Share 4400
Overall Net gain in the set of transaction 2200
SOLUTION 1B
In this case, the total value of ₹ 2,80,000 and the lot is 200, so, the NIFTY futures on the transaction date was
1.400 (i.e., 2,80,000 ÷ 200).
Now, on the settlement date, the NIFTY is 1378. So, it has reduced by 22 points. The loss to the investor is:
Loss = (1400- 1378) x 200+ 1000 = ₹ 4400 + ₹ 1000 = ₹ 5400
In case, he has sold the futures contract, his profit would have been:
Profit = (1400-1378) x 200 - ₹ 1,000 = ₹4400 - ₹ 1000 = ₹ 3400
It may be noted that in both the cases i.e. whether the investor is buying Future Contract or Selling Future Contract.
The brokerage of ₹ 1,000 would be payable.
SOLUTION 2A
Initial Margin (IM) = ₹ 10480(1310 × 100 ×0.08)
Maintenance Margin (MM) = ₹ 7860(1310 ×100 x 0.06)
Note : Initial Margin & Maintenance Margin are same for same for both long & short positions.
1. Status of investor who has gone long:
Day Settlement Opening Mark to Market Deposit Closing Balance
Price Balance C/F
1 1340 10480 +3000 ---- 13480
2 1360 13480 +2000 ---- 15480
3 1300 15480 -6000 ---- 9480
4 1280 9480 -2000 3000 10480
5 1305 10480 +2500 ---- 12980
Net profit (loss) on the contract: 3000+2000-6000-2000+ 2500 = (500)
Or Simply (1305- 1310) × 100 = -500
Why margin call of Rs 3000 at the end of Day 4 :
See at the end of Day 4 our balance falls below maintenance margin of ₹7860 i.e it falls to 9480-2000 =
7480. Now we know that whenever balance falls below Maintenance Margin we have to maintain the balance
upto the initial margin. Hence we have-made a margin call of₹3000 (10480-7480).
2. Status of the investor who has gone short:
Day Settlement Opening Mark to Market Deposit Closing Balance
Price Balance C/F
1 1340 10480 - 3000 3000 10480
2 1360 10480 - 2000 ---- 8480
3 1300 8480 + 6000 ---- 14480
4 1280 14480 + 2000 ---- 16480
5 1305 16480 - 2500 ---- 13980
 6.2 DERIVATIVES ANALYSIS & VALUATION (FUTURES)
Net profit (loss) on the contract: = -3000 - 2000 + 6000 + 2000 - 2500 = 500
Or Simply (1310- 1305) x100 = 500
SOLUTION 2B
Initial Margin = μ+3
Where μ = Daily Absolute Change
= Standard Deviation
Accordingly
Initial Margin = ₹ 10,000 + ₹ 6,000 = ₹ 16,000
Maintenance margin = ₹ 16,000 x 0.75 = ₹ 12,000
Day Changes in future Values (₹) Margin A/c (₹) Call Money (₹)
4/2/09 - 16000 -
5/2/09 50 x (3294.40 - 3296.50) = -105 15895 -
6/2/09 50 x (3230.40 - 3294.40)= -3200 12695 -
7/2/09 50 x (3212.30 - 3230.40)= -905 16000 4210
10/2/09 50x(3267.50 - 3212.30)= 2760 18760 -
11/2/09 50x(3263.80 - 3267.50)= -185 18575 -
12/2/09 50x(3292 - 3263.80) =1410 19985 -
14/2/09 50x(3309.30 - 3292)=865 20850 -
17/2/09 50x(3257.80 - 3309.30)=-2575 18275 -
18/2/09 50x(3102.60 - 3257.80)=-7760 16000 5485
SOLUTION 3A
Fair Future Value = Spot Price × e rt = 1800 × e .08x(3/12) = ₹ 1836.36
Therefore Fair Future Value for 100 lots will be 100 x 1836.36= 183636
SOLUTION 3B
Calculation of spot price
The formula for calculating forward price is:
A=P 1+
Where A = Forward price
P = Spot Price
r = rate of interest
n = no. of compoundings
t = time
Using the above formula,
208.18 =P (1 + 0.08/12)
Or 208.18 = P x 1.0409
P = 208.18/1.0409 = 200
Hence, the spot price should be ₹200.
SOLUTION 4A
Fair Future Value = (Spot Price - Present Value Of Dividend) × e rt
Where Spot Price = 80; Present Value of Expected Dividend. = Dividend ×e - rt = 3(e) - .10x 3/l2
= 3e -.025
= 3× .975325 = 2.93.
Therefore Fair Future Value = (80 -2.93) × e 0.10 x 6/12 = 77.07 x 1.05127 = 81.02
SOLUTION 4B
Fair Future Value = (Spot Price - Present Value Of Dividend) × e rt
= (₹ 900 - 74.80) x e . 09 x 12/l2 = ₹ 825.20 x 1.09417
= ₹ 902.91
Where Present Value of Dividend = ₹ 40 x e (-.09 × 6/12) + 40 x e (-.09 × 12/12)
= ₹ 40 × e -0.045 + ₹ 40 × e-.09
= ₹ 40 × .95601 + 40 × .91393 = ₹ 38.24 + 36.56 = ₹ 74.80
 6.3

SOLUTION 5A
Fair Future Value = Spot Price × e (r-y)t
[ where y = dividend yield] = 1200 ×e (.10 - .08)3/12

= 1200 × e.005 = 1200 × 1.005025 = 1206.03

SOLUTION 5B
The duration of future contract is 4 months. The average yield during this period will be:
% % % %
= 3.25%
As per Cost to Carry model the future price will be
F = 𝑆𝑒 ( )

Where S = Spot Price

Rf = Risk Free interest
D = Dividend Yield
T = Time Period
Accordingly, future price will be
= ₹ 2,200 𝑒 ( . . ) /
= ₹ 2,200 𝑒 .
= ₹ 2,200 х 1.01593 = ₹ 2235.05
SOLUTION 6
We know that: Future Value = [Spot Price + PV Storage Cost] x ert
Where Present Value of Storage Costs payable after 6 months = 100 x 3 e – 6/12 × .10= 285.36
Value of Future = (100 x 480 + 285.36)e 6/12 × .10
= ₹ 50761 i.e. 507.61/gm.
Case I FFP=507.61 AFP=520 Over-valued
Case II FFP=507.61 AFP=490 Under-valued
SOLUTION 7A
5802 = (5000 + 250) × e (.15 – c)
× 1 ≥ 1.1052 = e (.15 – c)
≥ e.10 = e(.15 – c) ≥ c = 5%
QUESTION 7B
Fair Futures Price
= [Spot Price + Present Value Of Storage Costs - Present Value Of Convenience Yield] (1 + r)n
Or 10,800 = [10,000 + 500 - Present value of convenience yield] (1 +. 12)1
Or Present value of convenience yield = $ 921.286 per ton.
SOLUTION 8A
6 months forward price may be found as follows:
Fair Future Value = Spot Price × e rt= ₹ 180 x e.12x .5 = ₹ 180 × 1.06184 = ₹ 191.12
Decision:
Actual Future Price = ₹195 ; Fair Future Price = ₹ 191.12
Since Fair Future Price is less than Actual Future Price. Arbitrage Opportunity is possible.
Stock is Overvalued in Future Market.
For Arbitrage Gain:
(i) Buy the Stock in the Spot / Cash Market
(ii) For this Borrow the necessary amount
(iii) Then Sell the Stock in the Future Market.
Gain or Loss on Expiration:
Repayment including interest @ 12% c.c taken for borrowing and buying stock in the spot market.
[180 × e.12×6/12 = 180 x e .06 =>180 × 1.06189] 191.1312
Sell the Stock in the future market as per contract and collect 195
Net Gain 3.8688
 6.4 DERIVATIVES ANALYSIS & VALUATION (FUTURES)
SOLUTION 8B
The appropriate value of the 3 months futures contract is – Fo = ₹ 300 (1.008)3 = ₹ 307.26
Since the futures price exceeds its appropriate value it pays to do the following:-
Action Initial Cash flow at
Cash flow time T (3 months)
Borrow ₹ 300 now and repay with interest after 3 months + ₹ 300 - ₹ 300 (1.008)3 = - ₹
307.26
Buy a share - ₹ 300 ST
Sell a futures contract (Fo = 312/-) 0 ₹ 312 – ST
Total ₹0 ₹ 4.74
Such an action would produce a risk less profit of ₹ 4.74.
SOLUTION 8C
r×t
Fair Future Price = (Spot Price -Present Value of Dividend Income) e
12×6/12
= (7500-192.14) x e = 7307.85 x e.06 = 7307.85 x1.06187 = ₹ 7759.77
Working Notes: PV of dividend income = 2 x e-12 x 4/12 = 2 × e -0.04 = 2 x 0.96072 = 1.9214
On 100 Shares Total Dividend will be ₹ 192.14
Decision : Actual Future Price Fair Future Price
AFP FFP Valuation Future Market Spot Market
1 7400 7760 Under Buy Sell
2 7800 7760 Over Sell Buy
Or Decision:
When Actual Value is ₹ 7400
Since Actual Future Value < Fair Future Value, Stock is Undervalued in the Future Market.
For Arbitrage Gain, Sell the Stock in the Spot Market; Buy it in the Future Market.
When Actual Value is Rs 7800
Since Actual Future Value > Fair Future Value. Stock is overvalued in the Future Market.
For Arbitrage Gain: Buy the Stock in the Spot Market, Sell the Stock in the future market
Additional Analysis: Gain Or Loss : on Expiration i.e at the end of 6 months
(i) When the Contract Value is ₹ 7400
Sell the Stock in the Spot Market at ₹ 7500 and Invest the proceed at risk free
Rate of interest @ l2% c.c for 6 months and collect at the end of 6 months
₹ 7500 × e.12×6/12 Or 7500× 1.0618 i.e. 7963.8
Loss on Dividend Income to be received otherwise -204.04
2/12×.12
[200 × e Or 200 ×e.02Or 200 × 1.02020]
Purchase Stock in the Future Market as Contracted -7400
Gain 359.76
[Here we have assumed that arbitrageur holds 100 shares of the given stock initially]

(ii) When the Contract Value is ₹ 7800

Repayment including interest @ 12% c.c for borrowing and buying stock in the spot market
(₹ 7500 × e.12×6/12 Or 7500× 1.06189) -7963.8
Dividend to be received on Stock Purchased 204.04
[200 × e2/12×.12 Or 200 ×e.02Or 200 × 1.02020]
Sell the Stock in the future market as contracted and collected 7800
Gain 40.24
SOLUTION 8D
The fair price of the index future contract can be calculated as follows:
F = 13,800 + [(13,800 x 0.12 x - 13,800 x 4.8% x 0.50)]
= 13,800 + [828 - 331.20]
= 14,296.80
Since presently index is trading at ₹14,340, hence it is overpriced.
To earn an abnormal rate ofreturn, Mr. X shall take following steps:
 6.5

1.Mr. X shall buy a portfolio which comprising of shares as index consisted of.
2.Mr. X shall go for short position on index future contract.
Now we shall calculate return to Mr. X under two given situations:
(i) Return of Mr. X, if index closes at ₹10,200
₹
Profit from short position of futures (₹14,340 -₹10,200) 4,140.00
Cash Dividend on Portfolio (₹13,800 x 4.8% x 0.5) 331.20
Loss on sale of portfolio (₹10,200 -₹13,800) (3,600.00)
871.20
(ii) Return of Mr. X if index closes at ₹15,600
₹
Loss from short position in futures. (₹14,340 -₹15,600) (1,260.00)
Cash dividend on portfolio 331.20
Profit on sale of underlying portfolio (₹15,600 -₹13,800) 1,800.00
871.20
.
6 Months Return = x 100 = 6.31%
Annualized Return = 6.31 x 2 =12.63%
SOLUTION 9A
Hedge Required for SBI under Nifty=2,00,000 x .8= 1,60,000
He is Long on SBI Stock
Hence for Hedging he has to go short on Nifty.
He has taken Short Position of Nifty to the extent of 1,00,000.
Hence he is partially hedged. For complete hedge he has to take short position of Nifty to the extent of 1,60,000.
Hence Additional Hedge required = 1,60,000 - 1,00,000 = 60,000
SOLUTION 9B

Sl. No. Company Name Trend Amount (₹) Beta Index Value (₹) Position
(i) Right Ltd. Rise 50 lakh 1.25 62,50,000 Short
(ii) Wrong Ltd. Depreciate 25 lakh 0.90 22,50,000 Long
(iii) Fair Ltd. Stagnant 20 lakh 0.75 15,00,000 Long
SOLUTION 10A
No. of futures contracts to be Sold Or Purchase to reduce Or increase beta can be find out by using the following:

= × (Existing Beta – Desired Beta)

Therefore
(a) No. of Stock Index Futures (SIF) contacts to be sold to reduce beta

, , , ( . . )
= = 375 contracts
×

(b) No. of Stock Index Futures (SIF) contacts to be buy to increase beta

, , , ( . . )
= = 298.07 contracts
×
Working Note:
Stock Shares Stock Total Value Weights Beta Portfolio
Owned Purchased (Lacs) Beta
1 1,00,000 400 400 .31 1.1 .341
2 2,00,000 300 600 .46 1.2 .552
3 3,00,000 100 300 .23 1.3 .299
Total 1300 1.19
 6.6 DERIVATIVES ANALYSIS & VALUATION (FUTURES)
Note:
(i) If we want to reduce beta we have to sell Index Futures and
(ii) If we want to increase beta we have to purchase Index Futures.
SOLUTION 10B

Security No. of shares Market Price of (1) × (2) % to total ß (x) wx

(1) Per Share (2) (w)
VSL 10000 50 500000 0.4167 0.9 0.375
CSL 5000 20 100000 0.0833 1 0.083
SML 8000 25 200000 0.1667 1.5 0.250
APL 2000 200 400000 0.3333 1.2 0.400
1200000 1 1.108
Portfolio beta 1.108
(i) Required Beta 0.8
It should become (0.8 / 1.108) = 72.2 % of present portfolio If ₹ 12,00,000 is 72.20%, the total portfolio
should be ₹ 12,00,000 × 100/72.20 or ₹ 16,62,050
Additional investment in zero risk should be (₹ 16,62,050 – ₹ 12,00,000) = ₹ 4,62,050
Revised Portfolio will be
Security No. of Market Price of (1) × (2) % to total ß (x) wx
shares Per Share (w)
(1) (2)
VSL 10000 50 500000 0.3008 0.9 0.271
CSL 5000 20 100000 0.0602 1 0.060
SML 8000 25 200000 0.1203 1.5 0.180
APL 2000 200 400000 0.2407 1.2 0.289
Risk free asset 46205 10 462050 0.2780 0 0
1662050 1 0.800
(ii) To increase Beta to 1.2
Required beta 1.2
It should become 1.2 / 1.108 = 108.30% of present beta If 1200000 is 108.30%, the total portfolio should be
1200000 × 100/108.30 or 1108033 say 1108030
Additional investment should be (-) 91967 i.e. Divest ₹ 91970 of Risk Free Asset
Revised Portfolio will be
Security No. of shares Market Price of (1) × (2) % to total ß (x) wx
(1) Per Share (2) (w)
VSL 10000 50 500000 0.4513 0.9 0.406
CSL 5000 20 100000 0.0903 1 0.090
SML 8000 25 200000 0.1805 1.5 0.271
APL 2000 200 400000 0.3610 1.2 0.433
Risk free asset -9197 10 -91970 -0.0830 0 0
1108030 1 1.20
Portfolio beta 1.20
SOLUTION 10C
(i) Calculation of Portfolio Beta
Security Price of No. of Value Weightage Beta Weighted
the Stock shares wi Βi Beta
A 349.3 5,000 17,46,500 0.093 1.15 0.107
B 480.5 7,000 33,63,500 0.178 0.4 0.071
C 593.52 8,000 47,48,160 0.252 0.9 0.227
D 734.7 10,000 73,47,000 0.39 0.95 0.37
E 824.85 2,000 16,49,700 0.087 0.85 0.074
1,88,54,860 0.849
Portfolio Beta = 0.849
 6.7

(ii) Calculation of Theoretical Value of Future Contract

Cost of Capital = 10.5% p.a. Accordingly, the Continuously Compounded Rate of Interest ln (1.105) =
0.0998
For February 2013 contract, t= 58/365= 0.1589
Further F= Se
F = ₹ 5,900𝑒 ( . )( . )
.
F = ₹ 5,900𝑒
F = ₹ 5,900X1.01598 = ₹ 5,994.28
(iii) When total portfolio is to be hedged:
= = Portfolio Beta
, , ,
= = 0.894 = 13.35 contract say 13 or 14 contracts
.

(iv) When total portfolio beta is to be reduced to 0.6:

( ′ )
Number of Contracts to be sold =
, , , ( . . )
= = 3.92 contracts say 4 contracts
.

SOLUTION 10D

Shares No. of Market Price × (2) % to total ß (x) wx

shares of Per Share (₹ lakhs) (w)
(lakhs) (1) (2)
A Ltd. 3.00 500.00 1500.00 0.30 1.40 0.42
B Ltd. 4.00 750.00 3000.00 0.60 1.20 0.72
C Ltd. 2.00 250.00 500.00 0.10 1.60 0.16
5000.00 1 1.30
(1) Portfolio beta 1.30
(2) Required Beta 0.91
Let the proportion of risk free securities for target beta 0.91 = p
0.91 = 0 × p + 1.30 (1 – p)
p = 0.30 i.e. 30%
Shares to be disposed off to reduce beta 5000 × 30% ₹ 1,500 lakh
(3) Number of shares of each company to be disposed off
Shares % to total (w) Proportionate Amount Market Price Per No. of Shares
(₹ lakhs) Share (Lakh)
A Ltd. 0.30 450.00 500.00 0.90
B Ltd. 0.60 900.00 750.00 1.20
C Ltd. 0.10 150.00 250.00 0.60
(4) Number of Nifty Contract to be sold
( . . )×
= 120 contracts
×
(5) 2% rises in Nifty is accompanied by 2% x 1.30 i.e. 2.6% rise for portfolio of shares
₹ Lakh
Current Value of Portfolio of Shares 5000
Value of Portfolio after rise 5130
Mark-to-Market Margin paid (8125 × 0.020 × ₹ 200 × 120) 39
Value of the portfolio after rise of Nifty 5091
% change in value of portfolio (5091 – 5000)/ 5000 1.82%
% rise in the value of Nifty 2%
Beta 0.91
 6.8 DERIVATIVES ANALYSIS & VALUATION (FUTURES)
SOLUTION 11
(i) Beta of the Portfolio
Security Market Price No. of Shares Value β Value x β
A 29.4 400 11760 0.59 6938.4
B 318.7 800 254960 1.32 336547.2
C 660.2 150 99030 0.87 86156.1
D 5.2 300 1560 0.35 546
E 281.9 400 112760 1.16 130801.6
F 275.4 750 206550 1.24 256122
G 514.6 300 154380 1.05 162099
H 170.5 900 153450 0.76 116622
994450 1095832.3
, , .
Portfolio Beta = = 1.102
, ,
(ii) Theoretical Value of Future Contract Expiring in May and June
F = Se
F = 8500 x e0.20 x (2/12) = 8500 x e .
.
e shall be computed using Interpolation Formula as follows:
e 0.03
= 1.03045
e 0.04
= 1.04081
e0.01 = 0.01036
e 0.0033
= 0.00342
e0.0067 = 0.00694
.
e = 1.03045 + 0.00342 = 1.03387 or 1.04081 – 0.00694 = 1.03387
According the price of the May Contract
8500 X 1.03387 = ₹ 8788
Price of the June Contract
F = 8500 x e . x (3/12) = 8500 x e . = 8500 x 1.05127 = 8935.80
(iii) No. of NIFTY Contracts required to sell to hedge until June
= X

(A) Total portfolio

x 1.102=4.953 say 5 contracts
(B) 50% of Portfolio
.
x 1.102 = 2.47 say 3 contracts
(C) 120% of Portfolio
.
x 1.102= 5.94 say 6 contracts

SOLUTION 12A
Number of index future to be sold by the Fund Manager is:
. , , ,
= 4,605
,
Justification of the answer:
Loss in the value of the portfolio if the index falls by 10% is ₹ x 90 Crore = ₹ 9.90 Crore.
. , ,
Gain by short covering of index future is: = 9.90 Crore
, , ,
This justifies the answer cash is not part of the portfolio.
SOLUTION 12B
(i) Current future price of the index = 5000 + 5000 (0.09-0.06) = 5000+ 50= 5,050
Price of the future contract = ₹50 х 5,050 = ₹2,52,500
(ii) Hedge ratio = x 1.5 = 6 contracts
 6.9

Index after there months turns out to be 4500

Future price will be = 4500 + 4500 (0.09-0.06) × = 4,511.25
Therefore, Gain from the short futures position is = 6 х (5050 – 4511.25) х 50
= ₹1,61,625
SOLUTION 12C
No. of the Future Contract to be obtained to get a complete hedge
×₹ × . ×₹ ×
=
₹
₹ , , ₹ , ,
= = 70 contracts
₹
Thus, by purchasing 70 Nifty future contracts to be long to obtain a complete hedge.
Cash Outlay
= 10000 x ₹ 22 – 5000 x ₹ 40 + 70 x ₹ 1,000
= ₹ 2,20,000 – ₹ 2,00,000 + ₹ 70,000 = ₹ 90,000
Cash Inflow at Close Out
= 10000 x ₹ 22 x 0.98 – 5000 x ₹ 40 x 1.03 + 70 x ₹ 1,000 x 0.985
= ₹ 2,15,600 – ₹ 2,06,000 + ₹ 68,950 = ₹ 78,550
Gain/ Loss
= ₹ 78,550 – ₹ 90,000 = - ₹ 11,450 (Loss)
SOLUTION 12D
(i) Current portfolio
Current Beta for share = 1.6
Beta for cash = 0
Current portfolio beta = 0.85 x 1.6 + 0 x 0.15 = 1.36

(ii) Portfolio beta after 3 months:

Beta for portfolio of shares =

( )
.
1.6 =
( )

Change in value of market portfolio (Index) = (0.032 / 1.6) x 100 = 2%

Position taken on 100 lakh Nifty futures : Long
Value of index after 3 months = ₹ 100 lakh x (100 - 0.02)
= ₹ 98 lakh
Mark-to-market paid = ₹ 2 lakh
Cash balance after payment of mark-to-market = ₹ 13 lakh
Value of portfolio after 3 months = ₹85 lakh x (1 - 0.032) + ₹13 lakh
= ₹95.28 lakh
₹ ₹ .
Change in value of portfolio = = 4.72%
₹
Portfolio beta = 0.0472/0.02 = 2.36
SOLUTION 13
In order to hedge its position trader would go short on future at current future price of ₹ 18.50/kg.
Particulars
(a) Quantity of Rice to be hedged 440000 kg.
(b) Contract Size 2000 kg.
(c) No. of Contracts to be sold (a/b) 220
(d) Future Price ₹ 18.50/kg.
(e) Exposure in the future market (a x d) ₹ 81,40,000
After 3 months, trader would cancel its position in the future by buying a future contract of same quantity and will
sell Rice in the spot market and position shall be as follows:
Particulars
(a) Price of Future Contract 17.55/kg.
(b) Amount bought = 440000 x 17.55 77,22,000
(c) Gain(Loss) on future position (81,40,000 – 77,22,000) 4,18,000
(d) Spot Price 17.50/kg
 6.10 DERIVATIVES ANALYSIS & VALUATION (FUTURES)
(e) Amount realized by selling in the spot market (440000 x 17.50) 77,00,000
(f) Effective Selling Amount (c + e) 81,18,000
(g) Effective Selling Price (12,76,000/22000) 18.45/kg.
SOLUTION 14
To compute the return on investment we shall first compute profit on short sale which will be as follows:
=Beginning value - Ending value - Dividends - Trans. Cost - Interest
Accordingly beginning value of investment
= £5.60 x 10000 = £56000
Mr. V’s investment = Margin Requirement + Commission
= 0.45 × £56000 + £1550
= £25200 + £1550 = £26750
Ending value of investment = £4.50 × 10000 = £45000
(Closing out position)
Dividend = £0.25 × 10000 = £2500
Transaction cost = £1550 + £1450 = £3000
Thus,
Profit = £56000 - £45000 - £2500 - £3000 = £5500
The rate of return on investment will = £5500/£26750 = 20.56%
SOLUTION 15
The optional hedge ratio to minimize the variance of Hedger’s position is given by:

H= p

Where
σS = Standard deviation of ΔS
σF = Standard deviation of ΔF
ρ = coefficient of correlation between ΔS and ΔF
H = Hedge Ratio
ΔS = change in Spot price.
ΔF = change in Future price.
Accordingly
.
H = 0.75 x = 0.5
.
No. of contract to be short = 10 x 0.5 = 5
Amount = 5000 x ₹ 474 = ₹ 23,70,000