CA FINAL NEW COURSE
STRATEGIC FINANCIAL MANAGEMENT
TOP 50 Questions
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STRATEGIC FINANCIAL MANAGEMENT
Top 50 Questions
Q-1 Suppose current price of an index is Rs 13,800 and yield on index is 4.8% (p.a.). A 6-month
future contract on index is trading at Rs 14,340.
Assuming that Risk Free Rate of interest is 12%, show how Mr. X (an arbitrageur) can earn an
abnormal rate of return irrespective of outcome after 6 months. You can assume that after 6
months index closes at Rs 10,200 and Rs 15,600 and 50% of stock included in index shall pay
dividend in next 6 months.
Also calculate implied risk-free rate.
Q-2 On January 1, 2018 an investor has a portfolio of 5 shares as given below:
Security Price No. of Shares Beta
A 349.30 5,000 1.15
B 480.50 7,000 0.40
C 593.52 8,000 0.90
D 734.70 10,000 0.95
E 824.85 2,000 0.85
The cost of capital to the investor is 10.5% per annum.
You are required to calculate:
(i) The beta of his calculate:
(ii) The theoretical value of the NIFTY futures for February 2018.
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, (iii) The number of contracts of NIFTY the investor needs to sell to get a full hedge until
February for his portfolio if the current value of NIFTY is 5900 and NIFTY futures have a
minimum trade lot required of 200 units. Assume that the futures are trading at their fair
value.
(iv) The number of future contracts the investor should trade if he desires to reduce the beta
of his portfolios to 0.6.
No. of days in a year be treated as 365.
Given: In (1.105) = 0.0998 and e(0.015858) = 1.01598
Q-3 Mr. John established the following spread on the TTK Ltd. ’s stock:
1. Purchased one 3-month put option with a premium of Rs 15 and an exercise price of Rs 900.
2. Purchased one 3-month call option with a premium of Rs 90 and an exercise price of Rs
1100.
TTK Ltd. ‘s stock is currently selling at Rs 1000. Calculate gain or loss, if the price of stock of TTK
Ltd.
(i) Remains at Rs 1000 after 3 months.
(ii) Falls to Rs 700 after 3 months.
(iii) Raises to Rs 1200 after 3 months.
Assume the size of option is 200 shares of TTK Ltd.
Q-4 Sumana wanted to buy shares of EIL which has a range of Rs 411 to Rs 592 a month later.
The present price per share is Rs 421. Her broker informs her that the price of this share can
soar up to Rs 522 within months or so, so that she should buy a one-month CALL or EIL. In order
to be prudent in buying the call, the shares price should be more than or at least Rs 522 the
assurance of which could not be given by her broker.
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, Though she understands the uncertainty of the market, she wants to know the probability of
attaining the share price Rs 592 so that buying of a one-month CALL of EIL at the execution
price of Rs 522 is justified. Advise her. Take the risk-free interest to be 3.60% and e0.036 = 1.037.
Q-5 The shares of TIC Ltd. are currently priced at Rs 415 and call option exercisable in three
months’ time has an exercise rate of Rs 400. Risk free rate of interest is 5% p.a. and standard
deviation (volatility) of share price is 22%.
(i) Based on the assumption that TIC Ltd. is not going to declare any dividend over the next
three months, is the option worth buying for Rs 25?
(ii) Calculate value of the call option based on Black Scholes valuation model if the current
price is considered as Rs 380.
(iii) What would be the worth of put option if the current price is considered Rs 380?
(iv) If TIC share price is taken as Rs 408 and a dividend of Rs 10 is expected to be paid in the
two months’ time, then calculate value of the call option.
Q-6 AB Ltd.‘s equity shares are presently selling at a price of Rs 500 each. An investor is
interested in purchasing AB Ltd. ‘s shares. The investor expects that there is a 70% chance that
the price will go up to Rs 650 or a 30% chance that it will go down to Rs 450, three months from
now. There is a call option on the shares of the firm that can be exercised only at the end of
three months at an exercise price of Rs 550.
Calculate the following:
(i) If the investor wants a perfect hedge, what combination of the share and option should
he select?
(ii) Explain how the investor will be able to maintain identical position regardless of the share
price.
GMTESTSERIES.COM®
STRATEGIC FINANCIAL MANAGEMENT
TOP 50 Questions
Online Test Series for CA, CS & CMA Exams
Served more than 2 Lakh Students since 2014
GMTESTSERIES.COM®
, CA Final New Course
STRATEGIC FINANCIAL MANAGEMENT
Top 50 Questions
Q-1 Suppose current price of an index is Rs 13,800 and yield on index is 4.8% (p.a.). A 6-month
future contract on index is trading at Rs 14,340.
Assuming that Risk Free Rate of interest is 12%, show how Mr. X (an arbitrageur) can earn an
abnormal rate of return irrespective of outcome after 6 months. You can assume that after 6
months index closes at Rs 10,200 and Rs 15,600 and 50% of stock included in index shall pay
dividend in next 6 months.
Also calculate implied risk-free rate.
Q-2 On January 1, 2018 an investor has a portfolio of 5 shares as given below:
Security Price No. of Shares Beta
A 349.30 5,000 1.15
B 480.50 7,000 0.40
C 593.52 8,000 0.90
D 734.70 10,000 0.95
E 824.85 2,000 0.85
The cost of capital to the investor is 10.5% per annum.
You are required to calculate:
(i) The beta of his calculate:
(ii) The theoretical value of the NIFTY futures for February 2018.
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, (iii) The number of contracts of NIFTY the investor needs to sell to get a full hedge until
February for his portfolio if the current value of NIFTY is 5900 and NIFTY futures have a
minimum trade lot required of 200 units. Assume that the futures are trading at their fair
value.
(iv) The number of future contracts the investor should trade if he desires to reduce the beta
of his portfolios to 0.6.
No. of days in a year be treated as 365.
Given: In (1.105) = 0.0998 and e(0.015858) = 1.01598
Q-3 Mr. John established the following spread on the TTK Ltd. ’s stock:
1. Purchased one 3-month put option with a premium of Rs 15 and an exercise price of Rs 900.
2. Purchased one 3-month call option with a premium of Rs 90 and an exercise price of Rs
1100.
TTK Ltd. ‘s stock is currently selling at Rs 1000. Calculate gain or loss, if the price of stock of TTK
Ltd.
(i) Remains at Rs 1000 after 3 months.
(ii) Falls to Rs 700 after 3 months.
(iii) Raises to Rs 1200 after 3 months.
Assume the size of option is 200 shares of TTK Ltd.
Q-4 Sumana wanted to buy shares of EIL which has a range of Rs 411 to Rs 592 a month later.
The present price per share is Rs 421. Her broker informs her that the price of this share can
soar up to Rs 522 within months or so, so that she should buy a one-month CALL or EIL. In order
to be prudent in buying the call, the shares price should be more than or at least Rs 522 the
assurance of which could not be given by her broker.
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, Though she understands the uncertainty of the market, she wants to know the probability of
attaining the share price Rs 592 so that buying of a one-month CALL of EIL at the execution
price of Rs 522 is justified. Advise her. Take the risk-free interest to be 3.60% and e0.036 = 1.037.
Q-5 The shares of TIC Ltd. are currently priced at Rs 415 and call option exercisable in three
months’ time has an exercise rate of Rs 400. Risk free rate of interest is 5% p.a. and standard
deviation (volatility) of share price is 22%.
(i) Based on the assumption that TIC Ltd. is not going to declare any dividend over the next
three months, is the option worth buying for Rs 25?
(ii) Calculate value of the call option based on Black Scholes valuation model if the current
price is considered as Rs 380.
(iii) What would be the worth of put option if the current price is considered Rs 380?
(iv) If TIC share price is taken as Rs 408 and a dividend of Rs 10 is expected to be paid in the
two months’ time, then calculate value of the call option.
Q-6 AB Ltd.‘s equity shares are presently selling at a price of Rs 500 each. An investor is
interested in purchasing AB Ltd. ‘s shares. The investor expects that there is a 70% chance that
the price will go up to Rs 650 or a 30% chance that it will go down to Rs 450, three months from
now. There is a call option on the shares of the firm that can be exercised only at the end of
three months at an exercise price of Rs 550.
Calculate the following:
(i) If the investor wants a perfect hedge, what combination of the share and option should
he select?
(ii) Explain how the investor will be able to maintain identical position regardless of the share
price.
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