Abhay bought 1000 shares of Panther Ltd. Panther has a beta 1.1 with the Sensex. Each Sensex contract is equal to 50 units. Panther now quotes at ₹ 100 and the Sensex futures is available at 4500 Index points. Required:

(ii) If the price in the spot market drops by 12%, how he will be protected? Current price of Panther Ltd. shares = ₹ 100 Price drops by 12% = ₹ 100 - (12% of ₹ 100) = ₹ 100 - ₹ 12 = ₹ 88 Fall in index = 12% / Beta = 12% / 1.1 = 10.91% Position in spot market: Value of the investment comes down. Loss = (₹ 100 - ₹ 88) * 1000 shares = ₹ 12 * 1000 = ₹ 12,000 Position in futures: Abhay has sold 22 contracts and gained 10.91 points per contract (assuming Sensex index drops by 10.91% from 4500, i.e., 4500 * 0.1091 = 490.95 points drop, so gain is 490.95 points per contract). Gain = 10.91 (points drop) * 22 (contracts) * 50 (units per contract) = ₹ 12,001 (approx ₹ 12,000) Gain of ₹ 12,000 is the same as the amount of loss, thus Abhay is protected.