Pinnacle Academy Mock Tests for November 2016 C A Final Examination

Downloaded from www.ashishlalaji.net Pinnacle Academy Mock Tests for November 2016 C A Final Examination 2 nd Floor, Florence Classic, 10, Ashapuri Soc, Opp. VUDA Flats, Jain Derasar Rd., Akota, Vadodara-20. ph: 98258 561 55 Question Paper of Mock Test 2 Strategic Financial Management Conducted on 3 rd October 2016 [Solution is at the end with marking for self-assessment] Q 1 is compulsory. Answer any 3 from the remaining. Time Allowed-2.5 hours Maximum Marks- 80 Q 1 Zaz plc. a UK company is in the process of negotiating an order amounting to Є2.8 million with a large German retailer on 6 months credit. If successful, this will be the first time that Zaz shall export goods to highly competitive German market. Zaz is considering following 3 alternatives for managing the transaction risk before the order is finalized: i. Mr. Peter, the marketing head, has suggested that in order to remove transaction risk completely, Zaz should invoice the German firm in Sterling using the current spot rate. ii. iii. Mr. Wilson, CEO, is doubtful about Mr. Peter s proposal and suggested an alternative of invoicing the German firm in Є and using forward exchange contract to hedge the transaction risk. Ms. Karen, CFO is agreed with the proposal of Mr. Wilson to invoice the German firm in Є, but she is of the opinion that Zaz should use 6-months futures contracts (do not over-hedge) to hedge transaction risk. Following data is available: Spot rate Є 1.1960 Є 1.1970 / 6 months swap points 60 / 55 6 months futures contract currently trading at Є 1.1943 / 6 months futures contract size 62,500 Spot rate and 6 months futures rate Є 1.1873 / You are required to calculate sterling receipts (rounded off up to 4 digits after decimal point) in millions for Zaz plc under each of the above three proposals and suggest the most appropriate proposal. (8 Marks) (Assessed answer papers shall be returned on 12 th October 2016) 1

Downloaded from www.ashishlalaji.net (b) A Company is evaluating three investment projects: Project Investment Present value of Required Future cash flows 1 Rs.200,000 Rs.290,000 2 115,000 185,000 3 270,000 400,000 If projects 1 and 2 are jointly undertaken, there will be no economies; the investments required and present values will simply be the sum of the parts. With projects 1 and 3, economies are possible in investment because one of the machines acquired can be used in both production processes. The total investment required for projects 1 and 3 combined is Rs.440,000. If projects 2 and 3 are undertaken, there are economies to be achieved in marketing and producing the projects but not in investment. The expected present value of future cash flows for projects 2 and 3 is Rs.620,000. If all three projects are undertaken simultaneously, the economies noted will still hold. However, a Rs.125,000 extension on the plant will be necessary, as space is not available for all three projects. Which project or projects should be chosen? (6 Marks) (c) Q 2 Mr. V decides to short sell 1,000 shares of ABC Ltd. when it was selling at an yearly high of Rs.56. His broker requested him to deposit a margin of 45% and commission of Rs.1,550. While the share had been short sold, ABC Ltd. paid a divided of Rs.2.5 per share. At the end of one year, Mr. V buys 1,000 shares of ABC Ltd. at Rs.45 to close out the position and was charged a commission of Rs.1,450. You are required to calculate the return on investment for Mr. V. (6 Marks) Mr. NK has categorized all available stock in market into following types: Small Cap Growth Stocks Small Cap Value Stocks Large Cap Growth Stocks Large Cap Value Stocks Mr. NK has also estimated the weights of the above categories of stocks in the market index. Further more, the sensitivity of returns on these categories of stocks to three important factors are also estimated as under: Category of Stock Weight in Market Index Factor I [Beta] Factor II [Price / Book) Factor III [Inflation] Small Cap Growth Stocks 25 % 0.80 1.39 1.35 Small Cap Value Stocks 10 % 0.90 0.75 1.25 Large Cap Growth Stocks 50 % 1.165 2.75 8.65 Large Cap Value Stocks 15 % 0.85 2.05 6.75 Risk Premium 6.85 % - 3.5 % 0.65 % Rate of Return on treasury bonds is 4.5 % (Assessed answer papers shall be returned on 12 th October 2016) 2

Required: Downloaded from www.ashishlalaji.net i. Using Arbitrage Pricing Model determine the expected return for market index. ii. Using Capital Asset Pricing Model determine the expected return for market index. iii. Mr. NK wants to construct a portfolio constituting only Small Cap Value and Large Cap Growth stocks. If the target beta for the desired portfolio is 1, determine the proportion to be invested in Small Cap Value and Large Cap Growth. (10 Marks) (b) Digital Electronic System Corporation (DESC) pays no cash dividends currently and is not expected to for the next five years. Its latest EPS is Rs.10 all of which was reinvested in the company. The firm s expected ROE for the next five years is expected to be 20% p.a. and during this time it shall continue to reinvest all of its earnings. It is expected that starting six years from now ROE of DESC shall fall to 15% and it is expected that the firm shall start paying dividend at a payout of 40%, which will continue forever. Market capitalization rate is 15%. i. What is the value of DESC s share today? ii. Now, suppose current MPS is equal to as computed in above, then what do you expect to happen to its price over the next year? The year after? iii. If you are expecting that DESC to payout only 20% of earnings from year 6 how shall your estimate be affected? (10 Marks) Q 3 Pioneers Leasing Ltd. engaged in leasing business is structuring lease rent for a machine costing Rs.30 lakhs. The average post-tax cost of funds with effective taxrate of 35% is 10%. The lease period is for 5 years and the lease rents are to be charged at the beginning of each year. The maintenance and repair expenses amount to Rs.50,000 p.a. These expenses shall be borne by the lessor but are to be indirectly recovered from the lessee by suitable mark-up in the lease rent. The salvage value at the end of the useful life of 5 years shall be Rs.2 lakhs. The machine will be depreciated in 5 years on SLM basis. What annual lease rent should Pioneers Leasing quote to the customer? (10 Marks) (b) On 1 st April 2009 Fair Return mutual fund has following assets and prices at 4.00 p.m.: Shares No. of Shares MPS (Rs.) A Ltd. 10,000 19.70 B Ltd. 50,000 482.60 C Ltd. 10,000 264.40 D Ltd. 1,00,000 674.90 E Ltd. 30,000 25.90 No. of units of the fund 8,00,000 Please calculate: (Assessed answer papers shall be returned on 12 th October 2016) 3

i. NAV of the fund Downloaded from www.ashishlalaji.net ii. iii. Assuming, Mr. X a HNI sends a cheque of Rs.50,00,000 to the fund and fund manager purchases 18,000 shares of C Ltd. and balance is held in bank. What shall be the position of the fund? Now, suppose on 2 nd April 2009 at 4.00 p.m. market prices are as under: Shares MPS (Rs.) A Ltd. 20.30 B Ltd. 513.70 C Ltd. 290.80 D Ltd. 671.90 E Ltd. 44.20 What is the new NAV? (10 Marks) Q 4 A Ltd. is considering Rs.50 crores 3 year interest rate swap. The company is interested in borrowing at floating rate. However, due to its good credit rating, it has a comparative edge over lower rated companies in fixed rate market as well. It can borrow at fixed rate of 6.25% p.a. or floating rate of MIBOR + 0.75%. Presently, MIBOR is 5.25% but is expected to change in 6 months due to political situation in the country. X Ltd., an intermediary bank has agreed to arrange a swap. The bank will offset the swap risk with a counter party, B Ltd., a comparative lower credit rated company, which could borrow at fixed rate of 7.25% and floating rate of MIBOR + 1.25%. X Ltd. shall charge Rs.12,00,000 p.a. as its fee from each party. A Ltd. been the dominating company shall obtain 60% of any arbitrage saving (before payment of fees) from the swap. Fees payable to the bank is tax deductible. Tax rate is 30%. You are required to- i. Evaluate whether the proposal is beneficial for both the parties or not ii. Assuming MIBOR increases to 5.75% immediately 6 months from now and shall prevail over the swap period, determine present value of savings from the swap for A Ltd. Assume, interest payments are made semi-annually in arrears. Use the then prevailing interest rate as the discount rate. (10 Marks) (b) i. ABC Ltd. has divisions A, B and C. Division C has recently reported an annual operating profit of Rs.20,20,00,000. The figure arrived at after charging Rs.3 crores full cost of advertisement expenditure for launching a new product. However, benefits of this expenditure is expected to last for 3 years. Cost of capital of division C is 11 % and cost of debt is 8%. Net assets (invested capital) of division C as per latest balance sheet is Rs.60 crores, but replacement cost of these assets is estimated at Rs.84 crores. Compute EVA of division C making suitable adjustments to historical accounting books. ii. Herbal Gyan is a small but profitable producer of beauty cosmetics using the plant, Aloe Vera. Average earnings of the company averages Rs.12 lakhs after tax largely on the strength of its patented beauty cream for removing pimples. The patent has eight years to run and Herbal has been offered Rs.40 lakhs for the patent rights. Herbal s assets include Rs.20 lakhs of working capital and Rs.80 lakhs of PPE. The patent is not shown in books. Cost of capital of Herbal is 15%. Compute EVA of Herbal Gyan. (10 Marks) 4

Q 5 Downloaded from www.ashishlalaji.net Following information is available for XYZ Ltd. which is expected to grow at higher rate for 4 years after which growth rate shall stabilize at lower level: Base Year Information: Revenue EBIT Capital Expenditure Depreciation Rs.2,000 crores Rs.300 crores Rs.280 crores Rs.200 crores Information for high growth and stable growth period are as follows: High Growth Stable Growth Growth in Revenue and EBIT 20 % 10 % Growth in Capex and Depreciation 20 % Capex offset by Depreciation Risk free rate 10 % 9 % Equity Beta 1.15 1 Market risk premium 6% 5% Pre-tax cost of debt 13 % 12.86 % Debt-Equity Ratio 1 : 1 2 : 3 For all time working capital is 25 % of revenue and corporate tax rate is 30%. (b) What is the value of the firm? A mutual fund is holding following assets in Rs. crores: Investment in diversified equity shares 90.00 Cash and Bank Balance 10.00 (10 Marks) Beta of equity portfolio is 1.1. Index futures are selling at 4300 level. The fund manager apprehends that the index will fall at the most by 10%. How many index futures contracts he should short for perfect hedging? One index future contract consists of 50 units. Substantiate your answer assuming the fund manager s apprehension materializes. (6 Marks) (c) Shares of D Ltd. are currently selling at Rs.500 per share. A 3-month call option and put option are available at a strike price of Rs.520 at a premium of Rs.5 and Rs.3 per share respectively. The expected market price of the share at the end of the option period is predicted to be Rs.540 by one stock-analyst, while another stock-analyst predicts the same to be Rs.510. Determine net pay off of the investor at the two probable spot prices for (i) Long Call (ii) Long Put (iii) Long Straddle Which strategy do you suggest? Best of Luck! (4 Marks) 5

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Downloaded from www.ashishlalaji.net Solution of CA Final SFM Mock Test 2 Q 1 Conducted on 3 rd October 2016 Exchange rates are tabulated as under: 1 Є per (Indirect quote for UK Firm) Spot 1.1960 1.1970 Swap Points.0060.0055 6 months forward rate 1.1900 1.1915 1 per Є (Direct quote for UK Firm) Bid Rate Offer Rate Spot 0.8354 0.8361 6 months forward rate 0.8393 0.8403 (i) Value of deal in euros is 2.8 million. One needs to find that amount in pounds, which if sold right now shall result into receipt of EUR 2.8 million. If pound is sold then bank shall buy at bid rate. Hence. GBP receipt shall be 2.8 X.8354 i.e. 2.3391 million 2.8 X.8354 i.e. 2.3391 million (ii) 6 months forward exchange contract should be acquired to sell EUR. Such contract is available at EUR 0.8393 per GBP. Hence, GBP receipt shall be 2.8 X.8393 i.e. 2.3500 million (iii) 6 months futures rate as direct quote is: EUR 0.8373 per GBP Standard size of 1 contract in EUR = 62,500 / 0.8373 i.e. EUR 74,645 No. of contracts required = 2.8 / 0.074645 = 37.51 i.e. 37 contracts as over-hedging is to be avoided. Gain / Loss for futures is determined as under Spot rate after 6 months 0.8422 Contracted futures rate for selling 0.8373 Loss per unit 0.0049 X Contract size (74,645 X 37) (in millions) 2.7619 Total Loss (GBP in millions) 0.0135 Actual sale of EUR 2.8 million shall be done in the spot market after 6 months. Thus, GBP receipt is 2.8 X.8422 i.e. 2.3582 Loss on futures 0.0135 i.e. 2.3447 million (4 Marks) Recommendation: Forward Contract in view of highest GBP receipts after 6 months. Solution prepared by CA. Ashish Lalaji 7

(b) Downloaded from www.ashishlalaji.net (Rs. in 000s) Combination PV of Cash Inflows PV of Cash Outflows NPV 1 290 200 90 2 185 115 70 3 400 270 130 1, 2 475 (290 + 185) 315 (200 + 115) 160 1, 3 690 (290 + 400) 440 (given) 250 2, 3 620 (given) 385 (115 + 270) 235 1, 2, 3 910 (290 + 620) 680 (440 + 115 + 125) 230 As the NPV is maximum for projects 1 and 3, the same combination be selected. (c) (6 Marks) Margin paid on short selling = 1,000 X 56 i.e. 56,000 X 45% i.e. Rs.25,200 Thus, money blocked due to short selling = 25,200 + Commission 1,550 = Rs.26,750 Due to short selling dividend of Rs.2,500 is foregone. This shall be an opportunity cost. Shares are purchased at the end of the year for Rs.45,000. Again, commission of Rs.1,450 is charged. Thus, profit on short selling is 56,000 45,000 Dividend foregone 2,500 Commissions (1,550 + 1,450) i.e. Rs.5,500. Q 2 Return on investment = 5,500 / 26,750 i.e. 20.56 % (i) Calculation of Return for Individual Groups based on APM: (6 Marks) Small Cap Growth: 4.5 + 0.8 (6.85) + 1.39 (-3.5) + 1.35 (.65) = 5.9925 % Small Cap Value: 4.5 + 0.9 (6.85) +.75 (-3.5) + 1.25 (.65) = 8.8525 % Large Cap Growth: 4.5 + 1.165 (6.85) + 2.75 (-3.5) + 8.65 (.65) = 8.47775 % Large Cap Value: 4.5 + 0.85 (6.85) + 2.05 (-3.5) + 6.75 (.65) = 7.535 % Expected return on market index is 5.9925 (.25) + 8.8525 (.1) + 8.47775 (.5) + 7.535 (.15) = 7.7525 % (ii) Calculation of Return for Individual Groups based on CAPM: Small Cap Growth: 4.5 + 0.8 (6.85) = 9.98 % Small Cap Value: 4.5 + 0.9 (6.85) = 10.665 % Large Cap Growth: 4.5 + 1.165 (6.85) = 12.48025 % Large Cap Value: 4.5 + 0.85 (6.85) = 10.3225 % Expected return on market index is 9.98 (.25) + 10.665 (.1) + 12.48025 (.5) + 10.3225 (.15) = 11.35 % (4 Marks for above) (3 Marks for above) (iii) Proportion to be invested in Small Cap Value and Large Cap Growth: Let proportion to be invested in Small Cap be x..9x + 1.165 (1 x) = 1.9X + 1.165 1.165x = 1.265x =.165 X = 0.6226 8

Downloaded from www.ashishlalaji.net Thus, 62.26 % should be invested in Small Cap Value and 37.74 % in Large Cap Growth to ensure portfolio beta of 1. (3 Marks for above) (b) (i) Estimation of EPS and DPS for DESC: Year 0 1 2 3 4 5 6 EPS 10 12 14.4 17.28 20.74 24.88 28.61 DPS -- -- -- -- -- -- 11.44 Since the company is growing at 20 % p.a., EPS has been increased each year by 20% for 1 st five years. Growth rate falls to 15% in year-6. Hence, for EPS of 6 th year, 15% has been added to EPS of 5 th year. The 6 th year EPS has been multiplied by the expected D/P ratio of 40%. (3 Marks) Now, growth rate of dividend, g = b.r = 60 % X 15 % = 9 % P 5 = 11.44 / 15 % - 9% = Rs.190.67, P 0 = 190.67 X PVF (15%, 5th).497 = Rs.94.76 (ii) P 1 = 190.67 X PVF (15%, 4th).572 = Rs.109.06, P 2 = 190.67 X PVF (15%, 3rd).658 = Rs.125.46, In other words, share price is rising by 15% (3 Marks) Q 3 (iii) Revised g = 80 % X 15 % = 12%, P 5 = 5.722 / 15 % - 12% = Rs.190.73, In other words, no change in P 0 Let the lease rent to be charged at the beginning of each year be Rs.X. Year 0 1 4 5 Lease Rent X X --- Taxes paid --- 0.35X 0.35X Net cash inflow X 0.65X (0.35X) PVF (10%) 1.000 3.170 0.621 PV X 2.061X (0.217X) 2.843X Depreciation p.a. = 30,00,000 2,00,000 / 5 = Rs.5,60,000 Tax shield on depreciation p.a. = 5,60,000 X 35% = Rs.1,96,000 Tax shield on expenses p.a. = 50,000 X 35% = Rs.17,500 Net cash inflow p.a. = 1,96,000 + 17,500 50,000 = Rs.1,63,500 PV of total cash inflow = 1,63,500 X 3.791 = Rs.6,19,829 PV of salvage value = 2,00,000 X 0.621 = Rs.1,24,200 Now, the lease rent should so structured that the cost of the asset is recovered i.e. 2.843X + 61,9,829 + 1,24,200 = 30,00,000 i.e. X i.e. Lease rent = Rs.7,93,518 Solution prepared by CA. Ashish Lalaji (10 marks) 9

(b) (i) NAV of the fund: Downloaded from www.ashishlalaji.net Shares No. of Shares MPS (Rs.) Market Value A Ltd. 10,000 19.70 1,97,000 B Ltd. 50,000 482.60 2,41,30,000 C Ltd. 10,000 264.40 26,44,000 D Ltd. 1,00,000 674.90 6,74,90,000 E Ltd. 30,000 25.90 7,77,000 9,52,38,000 No. of units of the fund 8,00,000 NAV 119.05 (3 Marks) (ii) Revised Position of the Fund: Shares No. of Shares MPS (Rs.) Market Value A Ltd. 10,000 19.70 1,97,000 B Ltd. 50,000 482.60 2,41,30,000 C Ltd. 28,000 264.40 74,03,200 D Ltd. 1,00,000 674.90 6,74,90,000 E Ltd. 30,000 25.90 7,77,000 Cash 2,40,800 10,02,38,000 No. of units of the fund 8,42,000* * 8,00,000 + 50,00,000 / 119.05 i.e. 8,00,000 + 42,000 (iii) NAV of the fund on 2 nd April 2009: (4 Marks) Q 4 Shares No. of Shares MPS (Rs.) Market Value A Ltd. 10,000 20.30 2,03,000 B Ltd. 50,000 513.70 2,56,85,000 C Ltd. 28,000 290.80 81,42,400 D Ltd. 1,00,000 671.90 67,19,000 E Ltd. 30,000 44.20 13,26,000 Cash 2,40,800 10,27,87,200 No. of units of the fund NAV 8,42,000 122.08 (i) Evaluation of Interest Rate Swap Agreement: Quality Spread is determined as under: Firm Desired Actual Market Cost Market Cost A Ltd. Floating MIBOR + 0.75% Fixed 6.25% B Ltd. Fixed 7.25% Floating MIBOR + 1.25% Total MIBOR + 8% MIBOR + 7.5% Quality spread = MIBOR + 8 % - MIBOR 7.5% = 0.5%. A shall receive 60 % i.e. 0.3% and B shall receive balance 0.2%. Solution prepared by CA. Ashish Lalaji (3 Marks) (1 Mark) 10

Evaluation from view point of A Ltd.: Amount (Rs.) Savings on loan (Rs.50 crores X 0.3%) 15,00,000 Post tax benefit (15,00,000 X 70%) (A) 10,50,000 Charges payable to bank 12,00,000 Post tax charges (12,00,000 X 70%) (B) 8,40,000 Downloaded from www.ashishlalaji.net Net Benefit (A B) 2,10,000 Evaluation from view point of B Ltd.: (3 Marks) Amount (Rs.) Savings on loan (Rs.50 crores X 0.2%) 10,00,000 Post tax benefit (10,00,000 X 70%) (A) 7,00,000 Charges payable to bank 12,00,000 Post tax charges (12,00,000 X 70%) (B) 8,40,000 Net Benefit (A B) (1,40,000) Conclusion: Interest rate swap is not beneficial to both the parties. (ii) A Ltd. is receiving benefit of 0.3% due to swap. Hence, post-swap the effective cost for A Ltd. is MIBOR +.75 % -.3% i.e. MIBOR +.45%. At MIBOR of 5.25%, A Ltd. is paying interest at 5.25 +.45 i.e. 5.7%. If MIBOR rises to 5.75% then after six months A Ltd. shall pay interest at 5.75 +.45 i.e. 6.2%. Half yearly savings due to swap = 15,00,000 X ½ = Rs.7,50,000. Half yearly discount rates: 1 st period of six months: 5.7 / 2 i.e. 2.85% Rest of the six months: 6.2 / 2 i.e. 3.1% (b) (i) Six Months Savings PVF PV 1 7,50,000 0.972 (2.85%) 2 7,50,000 0.941 (3.1%) 3 7,50,000 0.912 (3.1%) 40,50,750 4 7,50,000 0.885 (3.1%) 5 7,50,000 0.858 (3.1%) 6 7,50,000 0.833 (3.1%) PV of Savings 40,50,750 Historical cost profit is adjusted as under: Operating Profit 20,20,00,000 Add: Cost of unutilized advertisement expenditure 2,00,00,000 22,20,00,000 Invested capital at replacement cost is Rs.84 crores. EVA = 22.2 (84 X 11%) = Rs.12.96 crores (5 Marks) 11

Downloaded from www.ashishlalaji.net (ii) Q 5 Total capital employed = 80 + 20 + Patent 40 i.e. Rs.140 lakhs. EVA = 12 (140 X 15%) = (Rs.9 lakhs) EVA of Herbal Gyan is negative. Determination of WACC: High Growth Phase Stable Growth Phase Ke = 10 + 1.15 (6) = 16.9 % Ke = 9 + 1 (5) = 14 % Kd = 13 (1 0.3) = 9.1 % Kd = 12.86 (1 0.3) = 9 % Ko = 16.9 (1/2) + 9.1 (1/2) = 13 % Ko = 14 (3/5) + 9 (2 / 5) = 12 % (5 Marks) Determination of Incremental Working Capital: (Rs. in crores) Year Revenue Working Capital Required Working Capital Invested Incremental Working Capital 0 2,000 500 --- --- 1 2,400 600 500 100 2 2,880 720 600 120 3 3,456 864 720 144 4 4,147.2 1,036.8 864 172.8 5 4,561.92 1,140.48 1,036.8 103.68 Determination of Value of Firm as per FCFF Approach: (1 Mark) (Rs. in crores) Year EBIT Tax (30%) PAT Dep. CFAT Additional FCFF PVF (13%) PV Capex W.Cap 1 360 108 252 240 492 336 100 56.885 49.56 2 432 129.6 302.4 288 590.4 403.2 120 67.2.783 52.62 3 518.4 155.52 362.88 345.6 708.48 483.84 144 80.64.693 55.88 4 622.08 186.62 435.46 414.72 850.18 580.61 172.8 96.77.613 59.32 217.38 4 Continuing Value 18,766.613 11,503.56 Value of Firm (as a whole) 11,720.94 Computation of FCFF for 5 th year: (5 Marks) Particulars Amount (Rs. in crores) EBIT for 5 th year [622.08 (1.1)] 684.29 Less: Tax at 30% 205.29 PAT for 5 th year 479.00 Less: Additional Working Capital 103.68 FCFF for 5 th year 375.32 (1 Mark) Continuing Value at end of 4 th year = FCFF (at end of 5 th year) / ko g = 375.32 / 12 % - 10% = Rs.18,766 crores (1 Mark) 12

Downloaded from www.ashishlalaji.net (b) Value of Hedge Transaction = 90 X 1.1 X 100% = Rs.99 crores Since mutual fund has long position, appropriate hedge strategy is to short index futures. No. of units of index futures shorted = 99,00,00,000 / 4300 = 2,30,233 (approx) No. of contracts of index futures shorted = 2,30,233 / 50 = 4,605 (approx) Determination of Gain / Loss if Markets crash by 10%: If markets crash by 10% then equity portfolio shall crash by 11% (10 X 1.1) Cash Market: Value of equity after market crash (90 11%) 80.10 (b) Original purchase cost 90.00 (c) Total Gain (A) (in crores) (9.90) Futures Market: Index value after market crash (4,300 10%) 3,870 (b) Contracted futures price for selling 4,300 (c) Gain per unit 430 (d) No. of units (4,605 X 50) 2,30,250 (e) Total Gain (B) (in crores) 9.9 (3 Marks) (c) Overall gain (A + B) (i) Statement showing net payoff for Long Call: Nil (3 Marks) Spot Price 540 510 Strike Price 520 520 Gross Pay off 20 0 Premium paid 5 5 Net Pay off 15 (5) (1 Mark) 13

(ii) Statement showing net payoff for Long Put: Downloaded from www.ashishlalaji.net Spot Price 540 510 Strike Price 520 520 Gross Pay off 0 10 Premium paid 3 3 Net Pay off (3) 7 (iii) Statement showing net payoff for Long Straddle: Spot Price 540 510 Strike Price Call 520 520 Put 520 520 Gross Pay off Call 20 0 Put 0 10 20 10 Premium paid 8 8 Net Pay off 12 2 (1 Mark) Solution prepared by CA. Ashish Lalaji Be free to send your suggestions / comments to CA. Ashish Lalaji at 9825856155 / ashishlalaji@rediffmail.com 14