FINANCIAL DERIVATIVES
PROJECT REPORT
- Portfolio Selection
The portfolio was selected and formed consisting of five sectors-:
1. Automobile- TATA Motors
2. Energy- Adani Power
3. Telecommunication- Bharti Airtel
4. Pharmaceutical- Sun Pharma
5. Consumer Foods- Jubliant Foodworks
The main aim is to make portfolio diversifiable by calculating and using different Betas and reduce "unsystematic risk". Thus, the objective was to invest in various assets so that they will not all be affected the same way by market events.
|
Company
|
Amount Invested
|
Weight
|
Beta
|
Weighted Beta
|
Number of Shares
|
Price on 1st July (In INR)
|
|
Jubliant Food
|
199605.5
|
0.1996
|
1.4674
|
0.2930
|
170
|
1174.15
|
|
Adani Power
|
199984.95
|
0.2000
|
1.5301
|
0.3061
|
6633
|
30.15
|
|
Tata Motors
|
200102.3
|
0.2001
|
1.6003
|
0.3203
|
437
|
457.90
|
|
Bharti Airtel
|
200014.05
|
0.2000
|
0.3597
|
0.0720
|
543
|
368.35
|
|
Sun Pharma
|
199997.7
|
0.2000
|
0.6324
|
0.1265
|
262
|
763.35
|
|
TOTAL
|
999704.5
|
1.000
|
|
1.1179
|
|
|
(The minor differences in the weights of individual securities and amount invested are due to the objective of making the shares purchased (integer) in nature.)
On the 28th July 2016 the gain or loss on these stocks has been calculated to come at the Net Gain or Loss for the portfolio.
|
Company
|
No. of Shares
|
Price on 1st July (in INR)
|
Price on 28th July (in INR)
|
Profit (in INR)
|
|
Jubliant Foodworks
|
170
|
1174.15
|
1220.05
|
7803
|
|
Adani Power
|
6633
|
30.15
|
28.1
|
-13597.7
|
|
Tata Motors
|
437
|
457.90
|
506.85
|
21391.15
|
|
Bharti Airtel
|
543
|
368.35
|
371.9
|
1927.65
|
|
Sun Pharma
|
262
|
763.35
|
825.45
|
16270.2
|
|
TOTAL
|
|
|
|
33794.35
|
- Hedging by NIFTY futures
As required, the hedging for the portfolio was done by shorting the Index futures. For this number of futures to be shorted is calculated using formula (Beta*Value of Asset/Value of Future) which was equal to 1.79. Therefore, we short two index futures. The net profit on the hedged portfolio is a loss of Rs.19650.65/- due to bullishness in the market. The calculations are shown in the excel sheet.
|
NIFTY on 1st July
|
8310
|
|
No of future contracts to be shorted
|
2
|
|
NIFTY on 28th July
|
8666.3
|
|
Profit on Futures
|
-53445
|
|
Portfolio Gain
|
33794.35
|
|
Net Profit on Hedged Portfolio
|
-19650.65
|
- Increasing the Beta
The Beta was increased from 1.1179 to 1.4179 by going long on NIFTY futures. For this the number of futures to go long is calculated using formula (Beta*Value of Asset/Value of Future) which was equal to
Therefore, we buy one index future. The net profit on the hedged portfolio is a gain of Rs.60516.85/- due to bullishness in the market. The calculations are shown in the excel sheet.
|
NIFTY on 1st July
|
8310
|
|
No of future contracts to be bought
|
1
|
|
NIFTY on 28th July
|
8666.3
|
|
Profit on Futures
|
26722.5
|
|
Portfolio Gain
|
33794.35
|
|
Net Profit on Hedged Portfolio
|
60516.85
|
- Reducing the Beta
The Beta was reduced from 1.1179 to 0.8179 by going short on NIFTY futures. For this the number of futures to go long is calculated using formula (Beta*Value of Asset/Value of Future) which was equal to
Therefore, we short one index future. The net profit on the hedged portfolio is a gain of Rs.7071.85/- due to bullishness in the market. The calculations are shown in the excel sheet.
|
NIFTY on 1st July
|
8310
|
|
No of future contracts to be shorted
|
1
|
|
NIFTY on 28th July
|
8666.3
|
|
Profit on Futures
|
-26722.5
|
|
Portfolio Gain
|
33794.35
|
|
Net Profit on Hedged Portfolio
|
7071.85
|
- Hedging using PUT options
As required, the hedging for the portfolio was done using PUT index options. For this number of options to be purchased is calculated using formula (Beta*Value of Asset/Value of Option) which was equal to 1.79. Therefore, we buy two PUT index options at a strike price of Rs.8500/- by paying a premium of Rs.223.85/-; the total premium paid is Rs.33577.5/- (223.85*75*2). The main reason of hedging using PUT option is that we are bearish on the market. But, since the market has moved up, the option will not be exercised and we lose the premium. The net profit on the hedged portfolio is a gain of Rs.216.85/- due to bullishness in the market.
The calculations are shown in the excel sheet.
|
NIFTY on 1st July
|
8310
|
|
No of options to be purchased
|
2
|
|
NIFTY on 28th July
|
8666.3
|
|
Premium Paid
|
33577.5
|
|
Portfolio Gain
|
33794.35
|
|
Net Profit on Hedged Portfolio
|
216.85
|