Q04 (20 Marks)

Q04 (a) (10 Marks)

On 1st April Mr. Sarath bought S&P SL 20 index futures contract which cost him Rs. 610,200. For this he had to pay an initial margin of 61,020 to his broker. Each S&P SL 20 futures contract is for delivery of 200 S&P SL 20. On 25th April, the index closed at Rs. 3080. How much profit/ loss did he make?

Q04 (b) (10 Marks)

Assume that Mr. Silva holds 5000 shares of JKH. He plans to sell the shares three months later as he would need the money to get his daughter married. Today JKH trades at Rs. 136 in the spot market. Mr. Silva worried about a fall in price of JKH three months later, when he would actually need the money.He could of course sell the shares today and get Rs. 680,000 (136 X 5000) for them. However, he does not want to lose on the possibility of an increase in share price three months later.How can he ensure that he gets profits from a price increase but does not suffer losses from a price decrease? Explain using a pay-off diagram. (If you make any assumptions, write them clearly)