QUESTIONS AND ANSWERS ON CHAPTER 4

Q. On 15th January, Mr.Arvind Sethi bought a january Nifty futures contract which cost him Rs.2,40,000. Each Nifty futures contract is for delivery of 100 Nifties. On 25th January, the index closed at 2460. How much profit or loss did he make ?

- +6000
- -4500
- -3000
- +2500

A. Mr. Sethi bought one futures contract costing him Rs.2,40,000. At a market lot of TOO, this means he paid Rs.2400 per Nifty future. On the futures expiration day, the futures price converges to the spot price. If the index closed at 2460, this must be the futures close price as well. Hence he will have made a profit of (2460 – 2400 (x) 100). The correct answer is NO. 1.

Q. Kantaben sold a January Nifty futures contract for Rs.2,40,000 on 15th January. Each Nifty futures contract

is for delivery of 100 Nifties. On 25th January , the index closed at 2450. How much profit or loss did she make ?

- Minus 7000
- Minus 5000
- Plus 5000
- Plus 7000

A. Kantaben sold one futures contract costing her Rs.2,40,000. At a market lot of 100 this works out to be Rs.2400 per Nifty future. On the futures expiration day, the future price converges to the spot price. If the index closed at 2450, this must be the futures close price as well. Hence she will have made a loss of 2450 – 2400 (x) 100. The correct answer is NO.2.

Q. On 15th January Mr. Kajaria bought a January Nifty futures contract which cost him Rs.2,40,000. Each Nifty futures contract is for delivery of 100 nifties. On 25th January, the index closed at 2360. How much profit or loss did he make ?

- +6000
- -4000
- -3000
- +2500

A, Mr. Kajaria bought one futures contract costing him Rs.2,40,000. At a market lot of 100, this means he paid Rs.2400 per Nifty future. On the futures Expiration day, the futures price converges to the spot price. If the Index closed at 2360, this must be the futures close price as well. Hence he will have made a loss of2400 – 2360 (x) 100.

The correct answer is NO.2.

Q. Krishna Seth sold a January Nifty futures contract for Rs.2,40,000 on 15th January. Each Nifty futures contract is for delivery of 100 Nifties. On 25th January, the index closed at 2350. How much profit or loss did she make ?

- – 7000
- -5000
- + 5000
- +7000

A. Krishna seth sold one futures contract costing her Rs.2,40,000. At a market lot of 100, this works out to be Rs.2,400 per Nifty future. On the futures expiration day, the futures price converges to the spot price. If the index closed at 2350, this must be the futures close price as well. Hence she will have made of profit of 2400-2350 (x) 100.

The correct answer is NO.3.

Q. A speculator with a bullish view on a security can……..

- Buy stock futures
- Buy index futures
- Sell stock futures
- Sell index futures

A. The correct Answer is NO. 1.

Q. Mohan owns a thousand shares of Reliance. Around budget time, he get uncomfortable with the price movements. Which of the following will give him the hedge he desires ?

- Buy 10 Reliance future contracts.
- Sell 10 Reliance future contracts.
- Buy 5 Reliance futures contracts.
- Sell Index Futures.

A. Since he owns a thousand shares of Reliance, he will have to sell 10 reliance futures contracts (one contract has 100 underlying shares) to give him a complete hedge.

So the correct answer is NO.2.

Q. Santhosh is bullish about company XYZ and buys ten 1/10th XYZ futures contracts at Rs.2,96,000. On the last thursday of the month, XY Z closes at Rs.271, He makes

- Profit ofRs. 15,000
- Profit of Rs.25,000
- loss ofRs. 15,000
- loss of Rs.25,000

A. At Rs.2,96,000 per futures contract, it costs him Rs.296 per unit of futures, i.e., 296000/10 x 100. On expiration day the spot and futures converge. Therefore he makes a loss of 296 -271×1000 = 25,000. So the correct answer is NO.4.

Q. Rajeev is bearish about company ABC and sells twenty one month ABC futures contracts at Rs.3,04,000. On the last Thursday of the month, ABC closes at Rs. 134, He makes a

- Profit of Rs. 18000
- Profit otRs.36000
- Loss ofRs. 18000
- Loss of Rs.36000

A. At Rs.3,04,000 per futures contract, it costs him Rs.152 per unit of futures. On expiration da> the spot and the futures converge. There fore his profit is 152134 x 2000 = 36,000.

The correct answer is NO.2.

Q. Suppose the company PQR trades at 1000 in the cash market and two month PQR futures trade at 1030. If transactions costs involved are 0.4 %. what is the arbitrage return possible ?

1.1.8% per month 2.1.3 % per month 3.2% per month 4.1.1 % per month.

A. Return over two months is 1030/1000 = 3%, Minus the transactions costs of 0.4 % and the net return works out to be 2.6%. The return per month is 1.3%.

The correct answer is NO.2.

Q. Anand is bullish about the index. Spot Nifty stands at 2200. He decides to buy one three month Nifty call option contract with a strike of 2260 at a premium of Rs. 15 per call. Three months later, the index closes at 2295. His payoff on the position is

1.4000

2.9000

3.2000

4.None of the above.

A. Each call option earns him 2295 – 2260 – 15 = 20 x 100 = Rs.2000.

So the correct Answer is NO.4.

Q. Chethan is bullish about the Index. Spot Nifty stands at2200. He decides to buy one three month Nifty call option contract with a strike of 2260 at Rs.60 a call. Three months later the index closes at 2240. His payoff on the position is……..

1.7000

2.2000

3.4000

4.6000

A. The call expires out of the money. So he simply loses the call premium he paid, i.e., 60 x 100 = 60000. The correct answer is NO.4.

Q. Depak is bullish about the index. Spot Nifty stands at 2250. He decides to buy one three month Nifty call option contract with a strike of 2290 at Rs.20 per call. Threemonths later the index closes at 2230. His pay off on the position is

- Rs.7000
- Rs.2000
- Rs.4,000
- None of the above.

A. Each call option earns him 2230 – 2290 20 x 100 = Rs.2000.

The correct answer is NO.2.

Q. Satish is bullish about the index. Spot Nifty stands at 2225. He decides to buy one three month Nifty call option contract with a strike of 2260 at Rs.20 a call. Three months later the index closes at 2235. His pay off on the position is

1.7000

2.8000

3.4000

4.2000

A. The call expires out of the money, so he simply loses the call premium he paid, i.e., 20 x 100 = Rs.2000.

So the correct answer is NQ.4.

Q. Is it possible to earn excess profits in Hedging.?

A. Hedging does not always make money. The best that can be achieved using hedging is the removal of unwanted exposure, i.e., unnecessary risk. The hedged position will make less profits than the unhedged position, half the time. One should not enter into a hedging strategy hoping to make excess profits for sure; all that can come out of hedging is reduced risk.

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