Rajesh Chauhan is a successful doctor who is looking to invest some of his savings (INR 1,000,000) in Dr. Reddy’s Laboratories, an Indian multinational pharmaceutical company based in Hyderabad, Telangana, India. He can either buy common stock, which is currently selling for INR 2,486.10 per share, or he can purchase its warrants which provide for the purchase of two shares of common stock at INR 2,200, and are currently selling for INR 700. The stock is expected to rise to a market price of INR 2,600 next year, so the expected theoretical value of a warrant over the next year is INR 150. The expiration date of the warrant is one year from the present.

a. If Mr. Chauhan purchases the stock, holds it for one year, and then sells it for INR 2,600, what is his total gain? (Ignore brokerage fees and taxes.)

b. If Mr. Chauhan purchases the warrants and converts them to common stock in one year, what is his total gain if the market price of common shares is actually INR 2,600? (Ignore brokerage fees and taxes.)

c. Repeat questions a and b, assuming that the market price of the stock in one year is (1) INR 2,486.10 and (2) INR 2,200.

d. Discuss the two alternative and the tradeoffs associated with them.