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Amarjyoti Funds: Portfolio Management Services

Amarjothi Funds is a major private fund. It receives money from wealthy private investors and invests in equity securities in the Indian stock market. Its aim is to provide positive return to the investors even when the market is doing poorly, and it uses derivatives securities to hedge the equity price risk. Mr Nath is the portfolio manager for Amarjothi Funds. On April 1, he is considering as to what he should to do hedge his portfolio, as it is envisaged that the Indian market might not do well over the next six months. The value of the portfolio on April 1 is INR 3 billion. He has collected the following information, which is tabulated as follows:

Table 1 Sector-wise Portfolio Composition on March 1

Sector	Percentage Investment
Banking	22%
IT	26%
CFMG	12%
PSE	10%
Energy	5%
Pharma	5%
Industrial	20%

Table 2 Top Securities in the Portfolio and Percentage Investment

Company	Percentage Investment
Reliance	2.6%
Tata Power	2.4%
Mahindra and Mahindra	2.0%
Tata Motors	1.6%
Bharti Airtel	1.2%
ONGC	1.0%

Mr Nath is considering both index futures and single stock futures to hedge the portfolio. He has collected information on single stock futures and stock index futures in the NSE on April 1. Table 3 provides details of the futures on the NSE on April 1.

Table 3 Details of the Futures on the NSE

Name of Futures	Lot Size	Current Spot Value (INR)	Price of Futures Expiring on June 29 (INR)	Price of Futures Expiring on September 28 (INR)
S&P CNX Nifty	50	5,395	5,269	5,222
Bank Nifty	50	8.975	8,484	8,740
CNX IT	100	5,325	4,952	5,262
Reliance	700	2,245	2,090	2,153
Tata Power	200	1,460	1,370	1,411
Mahindra and Mahindra	312	940	837	862
Tata Motors	850	590	497	512
Bharti Airtel	500	480	446	460
ONGC	225	1,285	1,198	1,233

He has estimated the following information about his portfolios in relation to the indexes, as shown in Table 4:

Table 4 Relation Between Portfolio Owned and Indexes

Correlation between the total portfolio with CNX Nifty	0.60
Correlation between banking sector portfolio owned and Bank Nifty	0.96
Correlation between IT sector portfolio owned and CNX IT	0.98
Beta of total portfolio with respect to CNX Nifty	1.25
Beta of banking sector portfolio with Bank Nifty	1.02
Beta of IT sector portfolio with CNX IT	0.97
Risk-free rate	6%

Mr Nath is looking at various hedging possibilities:

Hedge the total portfolio only with the CNX Nifty futures

Hedge only the banking-sector portfolio with the Bank Nifty futures

Hedge only the IT-sector portfolio with the CNX IT futures

Hedge only the six securities that form the major investments

Use all of the hedges above.

The actual values of the various spot values on June 29 and September 28 are shown in Table 5: Table 5 Spot Values of Various Assets on June 29 and September 28

Name of the Futures	Spot Price on June 29 (INR)	Spot Price on September 28 (INR)
S&P CNX Nifty	5,120	5,180
Bank Nifty	8,438	8,695
CNX IT	4,937	5,300
Reliance	2,150	2,142
Tata Power	1,340	1,425
Mahindra and Mahindra	820	890
Tata Motors	522	495
Bharti Airtel	470	420
ONGC	1,220	1,156

For each of the strategies listed above,

1. Explain how you would hedge, that is, the number of contracts you would use, and whether you would take a long or short position.

2. Calculate the value of the portfolio on June 29 and September 28.

3. What is the gain in the value of the hedge portfolio when compared to the value if there was no hedge?

CASE STUDY Amarjothi Funds is a major private fund. It receives money from folio manager for Amarjothi Funds. On April 1, he is considering wealthy private investors and invests in equity securities in the as to what he should to do hedge his portfolio, as it is envisaged Indian stock market. Its aim is to provide positive return to the that the Indian market might not do well over the next six months. investors even when the market is doing poorly, and it uses deriva- The value of the portfolio on April 1 is INR 3 billion. Tables 1 and tives securities to hedge the equity price risk. Mr Nath is the port- 2 show the information he has collected. Table 1 Sector-wise Portfolio Composition on March 1 Table 2 Top Securities in the Portfolio and Percentage Investment Sector Percentage Investment 22% Percentage Investment 2.6% 2.4% 26% 12% Company Reliance Tata Power Mahindra and Mahindra Tata Motors Bharti Airtel ONGC Banking IT CFMG PSE Energy Pharma Industrial 2.0% 10% 1.6% 5% 5% 1.2% 1.0% 20% Mr Nath is considering both index futures and single stock futures stock futures and stock index futures in the NSE on April 1. Table 3 to hedge the portfolio. He has collected information on single provides details of the futures on the NSE on April 1. Table 3 Details of the Futures on the NSE Name of Futures Lot Size Current Spot Price of Futures Expiring Price of Futures Expiring Value (INR) on June 29 (INR) on September 28 (INR) S&P CNX Nifty 50 4,995 5,069 5,222 Bank Nifty 50 8,360 8,484 8,740 CNX IT 100 4,880 4,952 5,102 Reliance 700 2,060 2,090 2,153 Tata Power 200 1,350 1,370 1,411 Mahindra and 312 825 837 862 Mahindra Tata Motors 850 490 497 512 Bharti Airtel 500 440 446 460 ONGC 225 1,180 1,198 1,233 890 He has estimated the following information about his portfolios Table 5 Spot Values of Various Assets on June 29 in relation to the indexes, as shown in Table 4. and September 28 Table 4 Relation Between Portfolio Name of Spot Price Owned and Indexes Spot Price on on June 29 September 28 the Futures (INR) (INR) Correlation between the total portfolio with 0.60 CNX Nifty S&P CNX Nifty 5,120 5,180 Correlation between banking sector portfolio 0.96 Bank Nifty 8,438 8,940 owned and Bank Nifty CNX IT 4,937 5,300 Correlation between IT sector portfolio owned 0.98 and CNX IT Reliance 2,150 2,142 Beta of total portfolio with respect to CNX Nifty 1.25 Tata Power 1,340 1,425 Beta of banking sector portfolio with Bank Nifty 1.02 Mahindra and 820 Mahindra Beta of IT sector portfolio with CNX IT 0.97 Tata Motors 522 495 Risk-free rate 6% Bharti Airtel 470 420 ONGC 1,220 1,156 Mr Nath is looking at various hedging possibilities: Hedge the total portfolio only with the CNX Nifty futures Discussion Questions O Hedge only the banking-sector portfolio with the Bank Nifty futures 1. Explain how you would hedge, that is, the number of contracts O Hedge only the IT-sector portfolio with the CNX IT futures you would use, and whether you would take a long or short O Hedge only the six securities that form the major investments position for each of these strategies. o Use all of the hedges above. 2. Calculate the value of the portfolio on June 29 and September 28. The actual values of the various spot values on June 29 and 3. What is the gain in the value of the hedge portfolio when com- September 28 are shown in Table 5. pared to the value if there was no hedge? CASE STUDY Amarjothi Funds is a major private fund. It receives money from folio manager for Amarjothi Funds. On April 1, he is considering wealthy private investors and invests in equity securities in the as to what he should to do hedge his portfolio, as it is envisaged Indian stock market. Its aim is to provide positive return to the that the Indian market might not do well over the next six months. investors even when the market is doing poorly, and it uses deriva- The value of the portfolio on April 1 is INR 3 billion. Tables 1 and tives securities to hedge the equity price risk. Mr Nath is the port- 2 show the information he has collected. Table 1 Sector-wise Portfolio Composition on March 1 Table 2 Top Securities in the Portfolio and Percentage Investment Sector Percentage Investment 22% Percentage Investment 2.6% 2.4% 26% 12% Company Reliance Tata Power Mahindra and Mahindra Tata Motors Bharti Airtel ONGC Banking IT CFMG PSE Energy Pharma Industrial 2.0% 10% 1.6% 5% 5% 1.2% 1.0% 20% Mr Nath is considering both index futures and single stock futures stock futures and stock index futures in the NSE on April 1. Table 3 to hedge the portfolio. He has collected information on single provides details of the futures on the NSE on April 1. Table 3 Details of the Futures on the NSE Name of Futures Lot Size Current Spot Price of Futures Expiring Price of Futures Expiring Value (INR) on June 29 (INR) on September 28 (INR) S&P CNX Nifty 50 4,995 5,069 5,222 Bank Nifty 50 8,360 8,484 8,740 CNX IT 100 4,880 4,952 5,102 Reliance 700 2,060 2,090 2,153 Tata Power 200 1,350 1,370 1,411 Mahindra and 312 825 837 862 Mahindra Tata Motors 850 490 497 512 Bharti Airtel 500 440 446 460 ONGC 225 1,180 1,198 1,233 890 He has estimated the following information about his portfolios Table 5 Spot Values of Various Assets on June 29 in relation to the indexes, as shown in Table 4. and September 28 Table 4 Relation Between Portfolio Name of Spot Price Owned and Indexes Spot Price on on June 29 September 28 the Futures (INR) (INR) Correlation between the total portfolio with 0.60 CNX Nifty S&P CNX Nifty 5,120 5,180 Correlation between banking sector portfolio 0.96 Bank Nifty 8,438 8,940 owned and Bank Nifty CNX IT 4,937 5,300 Correlation between IT sector portfolio owned 0.98 and CNX IT Reliance 2,150 2,142 Beta of total portfolio with respect to CNX Nifty 1.25 Tata Power 1,340 1,425 Beta of banking sector portfolio with Bank Nifty 1.02 Mahindra and 820 Mahindra Beta of IT sector portfolio with CNX IT 0.97 Tata Motors 522 495 Risk-free rate 6% Bharti Airtel 470 420 ONGC 1,220 1,156 Mr Nath is looking at various hedging possibilities: Hedge the total portfolio only with the CNX Nifty futures Discussion Questions O Hedge only the banking-sector portfolio with the Bank Nifty futures 1. Explain how you would hedge, that is, the number of contracts O Hedge only the IT-sector portfolio with the CNX IT futures you would use, and whether you would take a long or short O Hedge only the six securities that form the major investments position for each of these strategies. o Use all of the hedges above. 2. Calculate the value of the portfolio on June 29 and September 28. The actual values of the various spot values on June 29 and 3. What is the gain in the value of the hedge portfolio when com- September 28 are shown in Table 5. pared to the value if there was no hedge