1

Suggested Solution
Test-8
Mission 80+ for N/D24

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Case Scenario-I
(i) (c) 34,966.566
(ii) (b) 34,982.914
(iii) (b) Market is likely to remain bullish
(iv) (c) falls below a rising moving average line
Hint:
Date 1 2 3 4 EMA
SENSEX EMA for [1-2] [3×0.064] [2 + 4]
Previous day
6 34522 35000 (478) (30.592) 34969.408
7 34925 34,969.408 (44.408) (2.842) 34966.566
10 35222 34966.566 255.434 16.348 34982.914
11 36000 34982.914 1017.086 65.094 35048.008
12 36400 35048.008 1351.992 86.527 35134.535
13 37000 35134.535 1865.465 119.390 35253.925
17 38000 35253.925 2746.075 175.749 35429.674

Conclusion – The market is bullish. The market is likely to remain bullish for short
term to medium term if other factors remain the same. On the basis of this
indicator (EMA) the investors/brokers can take long position.

Case Scenario-II
(i) (b) 17,926.14
(ii) (b) 18,148.60
(iii) (c) Gain of 47,850
(iv) (a) Loss of 1,14,860
Hint:
(i)
30 days Future Contract trading rate (current) = 18,000
Dividend yield (d) =2%
Risk free Interest rate (R f ) = 7 %
18,000 18,000
∴ Current value of index = (𝑅𝑓 −𝑑 ) 𝑇
= (0.07−0.02)×
30
𝑒 𝑒 365

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 3 Suggested Solution-Test-8

18,000 18,000
= = = 17,926.14
𝒆𝟎.𝟎𝟎𝟒𝟏𝟏 1.00412

(ii) Justified 90 days’ future contract price

90
= 17,926.14 × 𝑒 (𝑅𝑓 −𝑑) ×365
90
= 17,926.14 × 𝑒 (0.07−0.02)× 365
= 17,926.14 × 𝑒 0.01233
= 17,926.14 ×1.01241
= 18,148.60

(iii) Profit/Loss at 40 th days:

90 days future contract price = 18,148.60
Lot Size = 50
Total investment =  20,00,000
∴ No. of contract required to hedge = 2.2 (say 2 contracts)
20,00,000
( )
18,148.60 ×50

at 40th days index value = 18,500

∴ 90 days Future price
50
= 18,500 × 𝑒 (0.07−0.02)×365
= 18,500 × 𝑒 0.00685
= 18,500 × 1.00687
= 18,627.10

To hedge against rising price of stock, Mr. X must have bought 90 days
Future Index:
Buy rate = 18,148.60
Selling rate = 18,627.10
Net profit = (18,627.10 - 18,148.60) × 50 × 2
=  47,850
(iv) If the index value at 90 days is 17,000 then selling rate becomes lower
than the buying rate and Mr. X get loss in the Future contract.
Loss = (18,148.60 - 17,000) × 50 × 2
=  1,14,860

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 4

MCQ-III
Ans: (b) Plain Vanilla swap
Hint: A Plain Vanilla Swap is a financial contract where two parties agree to
exchange cash flows based on a notional principal amount. This swap
typically involves one party paying a fixed rate and the other paying a
floating rate, with the notional principal being used only for calculating
the payments and not exchanged itself. The most common type of Plain
Vanilla Swap is the interest rate swap.

MCQ-IV
Ans: (c) Dividend is paid on the shares
Hint: The Black-Scholes model makes certain assumptions:

➢ No dividends are paid out during the life of the option.

➢ Markets are random (i.e., market movements cannot be predicted).
➢ There are no transaction costs in buying the option.
➢ The risk-free rate and volatility of the underlying asset are known
and constant.
➢ The returns of the underlying asset are normally distributed.
The option is European and can only be exercised at expiration.

MCQ-V
Ans: (c) 7
Hint: Time Value of option 7= Call premium – Intrinsic Value
= Rs. (265+12) - (Rs.270) = Rs. 7

MCQ-VI
Ans: (b) Bid rate
Hint: In the foreign exchange market, the bid rate is the rate at which the
quoting bank is willing to buy the commodity currency.

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 5 Suggested Solution-Test-8

Part II (Descriptive Questions)

Question-1 Solution:

100,04,904

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Question –2 Solution:
Solution:

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 7 Suggested Solution-Test-8

Question –3 Solution
Solution:

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* NS Opinion:
While calculating profit of Mr. XYZ, Dividend paid to Mr. A has not been
deducted in the Suggested Solution of the ICAI.
But as per Author opinion, we must have to deduct dividend amount to calculate
profit or loss of M/s XYZ as dividend is payable by XYZ to Mr. A.

Question –4 Solution

FRA for Yen is Nil  FRA in Yen currency is not possible.

(1) 3M FRA rate at 3M forward (for $):
0M 3M 6M

4.5% p.a. FR = ?
5% p.a.

3 3 6
(1 + 0.045 × 12
) × (1 + FR × 12
) = (1 + 0.05 × 12
)

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9 Suggested Solution-Test-8

1.025
or, (1+0.25FR) =
1.01125
1.0136−1
∴ FR = = 0.0544 (i.e. 5.44% )
0.25

(2) Arbitrage Possibility:

0M 6M 12M

5% p.a. 6.5% - 6.75%

6.5% p.a.

Fair forward rate of 6X12 Contract:

6 6
(1 + 0.05 × ) × (1 + FR × ) = (1 + 0.065)
12 12

1.065
or, (1+0.5FR) =
1.025
1.039−1
∴ FR = = 0.078 (i.e. 7.80% )
0.5

(i) Arbitrage using FRA deposit rate 6.5%

It is lesser than fair forward rate (i.e. 7.8%). Hence arbitrage is
not possible using 6.5%.

(ii) Arbitrage using FRA borrowing rate 6.75%

As borrowing rate is lesser than fair forward rate (7.8%),
arbitrage is possible.

Actions to earn Arbitrage:

(i) Borrow @ 5% p.a. for 6 months
(ii) Deposit @ 6.5% for 12 months
(iii) Buy 6 X 12 FRA @ 6.75%

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Calculation:
Assume borrowing amount = $100
(i) Repayment of first borrowing at 6M
6
= $100 X (1 + 0.05 X ) = $ 102.50
12

(ii) Repayment of second borrowing under FRA:

Borrowing amount = $102.5
Rate = 6.75% p.a.
6
Repayment (at 12 M) = $102.5 × (1 + 0.0675 × )= $105.96
12
(iii) Withdrawal of Deposit = $ 100 X (1 + 0.065) = $ 106.50

(iv) Arbitrage = $ 106.50 - $ 105.96 = $ 0.54 (for $ 100 borrowing)

$ 0.54
Arbitrage for $ 1 borrowing = = $ 0.0054
100

Question-5 Solution:

Total %
Value of Value of Total No.
value of increase
NAV Conservative aggressive Revaluation of units in
Constant or
() Portfolio Portfolio Action aggressive
Ratio Plan decrease
() () portfolio
() in NAV
100.00 2,50,000 2,50,000 5,00,000 - - 2500.00
78.00 2,50,000 1,95,000 4,45,000 22.00% 222500 − 195000
78
2500.00

2,22,500 2,22,500 4,45,000 Buy 352.56 2852.56

units

92.00 2,22,500 2,62,435 4,84,935 2,42,468 − 2,62,435

2852.56
17.94% 92

2,42,467 2,42,468 4,84,935 Sell 217.03 2635.53

units

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 11 Suggested Solution-Test-8

86.00 2,42,467 2,42,468 4,84,935 6.52% - 2635.53

2,55,646 − 2,68,824
102.00 2,42,467 2,68,824 5,11,291 18.60%
102
2635.53

2,55,645 2,55,646 5,11,291 Sell 129.20

2506.33
units

98.00 2,55,645 2,45,620 5,01,265 3.92% - 2506.33

100.00 2,55,645 2,50,633 5,06,278 2.04% - 2506.33
102.00 2,55,645 2,55,646 5,11,291 2.00% - 2506.33
118.00 2,55,645 2,95,747 5,51,392 2506.33
2,75,696 − 2,95,747

15.68%
118

2,75,696 2,75,696 5,51,392 Sell 169.92 2336.41

units

120.00 2,75,696 2,80,369 5,56,065 1.69% - 2336.41

(a) Hence, the ending value of the portfolio under constant ratio plan is
5,56,065.
(b) Under buy & hold strategies, as on Oct-23
Since equal fund (2.5 Lac each) has been invested in equity & bond,
Value of Bond = 2,50,000 (no change)
Value of Equity = 2,50,000 ×120/100 = 3,00,000
Total value as on Oct-23 (under buy-hold plan) = 2,50,000 + 3,00,000
= 5,50,000
Value of Portfolio under Constant Ratio plan = 5,56,065
Value of Portfolio under Constant Ratio plan is better as on Oct-23

QUESTION – 6 Solution:

Export

JKL Ltd
$2 mill
₹ $2 mill 3m (1 Apr.)

Bank/ Exchange
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In this question, underlying currency is ₹.

(a) Forward Contract:

3m FR: ₹ 1 = $ 0.016129
1
$1 =
0.016129
1
$ 2,000,000 =( × 20,000,000) =  12,40,00,248
0.016129

Inflow on 1st April = 12,40,00,248

(b) Future Contract:

Buy  April Future @ $0.016118 to hedge the transaction
Equivalent  amount 2,000,000
= [ ] = 12,40,84,874
0.016118

Value of 1 contract = 23,41,224

12,40,84,874
No. of contract to be bought = = 53 contracts
23,41,224
Margin Payable = 50,000 × 53 contracts
= 26,50,000

On 1st April:

(i) Close Future Contract (i.e., square off by selling  @ $0.016134.)

Loss/gain:
Sale price of  $ 0.016134
Purchase price of  $ 0.016118
Gain per  $ 0.000016
Total gain on 10 contracts $ 1985.36
[$ (0.000016 × 23,41,224) × 53]

(ii) Total $ receipt on 1- Sept. =$ 2,000,000 + 1985.36

=$ 2,001,985.36

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 13 Suggested Solution-Test-8

(iii) Equivalent  at spot rate prevailing on 1- Sept.:

$ 0.016136 =1
1
$1 =
0.016136
1
$ 100755.20 = (0.016136 × 2,001,985.36)= 12,40,69,494

(iv) Interest loss on margin money =  (26,50,000 × 8% × 3/12)

=  53,000

(v) Net inflow in Future Contract = 12,40,69,494 – 53,000

= 12,40,16,494

(c) No hedging:
SR on 1st April:  1 = $ 0.016136
1
$ 2,000,000 = ( 0.016136 × 2,000,000)
=  12,39,46,455

Advice: Future contract is most advantageous as inflow is higher.

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