Project report - weights of individual securities

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Reference no: EM131482684

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

Reference no: EM131482684

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