This document appears to be an exam response from a student named Nidhi Tulsyan. It contains answers to several investment and risk management questions. The responses discuss topics like protective put strategies, covered calls, margin requirements, options pricing, and the advantages of rights issues over follow-on public offerings for companies raising equity capital.

1. Institute of Rural Management Anand
PGDM-RM41 – Term III – End Term Examination
< Investment and Risk Management >
< 6 APRIL 2021 >
<Nidhi Tulsyan, P41088 >
Page 1 of 10
ANS1- a) Protective Put and Covered Call
Protective Put-
The protective put approach is a hedging approach because in this the dealer shorts role in the
underlying asset and buys the ATM call option to cover against the rise in the price of underlying
asset. This approach is used when the trader is bearish and would like to guard the upward rise of
the price of underlying asset.
Risk profile- The maximum loss is limited to the premium paid for buying the Call option.
Reward profile- The maximum profit is unlimited in this strategy. The profit is dependent on the
sale price of the underlying asset.
Market view- Bearish
Covered Call-
Covered call is a basic option trading strategy used by dealers to save their huge share holdings. In
this traders’ own shares of the company and sell OTM call option of the company unless the stock
price increases so to enjoy the premium earned. The premium earned is the income of traders.
Risk profile- maximum loss is unlimited and depends solely on how much the price of shares falls.
Reward profile- we can earn premium for selling the call.
Market view- Bullish
b) Initial margin and margin call-
Initial margin-
It is the amount that a trader must deposit in his account to start a trading position with the broker.
Minimum margins are set by the exchange and are usually close to 10% of the total value of the
contract.
The calculation of initial margin is done using the concept of Value-at-Risk. It represents the loss
which a buyer/seller can incur of the future contracts with the 99% confidence over a specified
stock.
Margin call-
A margin call occurs when the value of a margin account falls below the account’s maintenance
margin requirement. It is a demand by a brokerage firm to bring the margin account’s balance up to
the minimum maintenance margin requirement. To satisfy a margin call, the investor of the margin

2. Institute of Rural Management Anand
PGDM-RM41 – Term III – End Term Examination
< Investment and Risk Management >
< 6 APRIL 2021 >
<Nidhi Tulsyan, P41088 >
Page 2 of 10
account must either deposit additional funds, deposit unmargined securities, or sell current
positions.
c) The possible loss in case of short call option Contract-
The short call option contract initiates a contract between the seller(writer) and the buyer (holder).
This results in a loss for the writer and an equivalent profit for the holder (net of the price paid by
the holder and received by the writer for the call option).
The maximum profit of the strategy is limited to the price received for selling the call option, and
the maximum loss is unlimited because of the price of the underlying asset may rise.
D)- Deep-in-the-money and out-of-the-money options-
Deep-in-the-money option-
In this type of option the strike price is significantly below for call option and above for put option
from the market price offered for the underlying assets.
The value of this option is near to all intrinsic value. By exercising this option the buyer makes
profit.
Out-of-the-money option-
This type of option only contains extrinsic value. It is also called OTM. A Call option is OTM if the
strike price of the call is above the underlying price of the assets trading in the market. A put option
is OTM if the underlying price of the assets is above the put’s strike price.
By exercising this option if buyer incur losses.
E)-
Right issue –
In the rights issue the additional offerings are made to only the existing shareholders. So there is
not much change in the ownership pattern of the company.
Rights issue is also much easier process, the company can spare additional costs and time in the
additional relevant tasks.
Rights issue encourage the subscription by giving more discount percentage so as to save the taxes
of the existing shareholders.
Rights issue is more profitable to the company due to lesser costs and more profit.
Share allotment is guaranteed in rights issue .

3. Institute of Rural Management Anand
PGDM-RM41 – Term III – End Term Examination
< Investment and Risk Management >
< 6 APRIL 2021 >
<Nidhi Tulsyan, P41088 >
Page 3 of 10
Follow-on public offering (FPO).
In FPO additional shares are issues to the public and there is major change in the ownership format
of the company.
Share allotment in FPO is not guaranteed.
FPO is very beneficial for the minority stakeholders.
ANS 3-
A) Expected harvest = 1000 MT
Lot size = 10000 MT / 10MT = 1000.
1 option contracts for = 20 lots.
Total options contract = 1000/20 = 50.
Appropriate contract date = 20 December (commodity date expiring 5 days before the given date)
If strike price < Market price, put option will not be exercised. Product will be sold in the market.
If strike price> Market price, put option will be exercised.
Then, we will close the position after the gains are realized from futures.
Sugarcane will be sold in the local market.
B)- If the option is expiring few days before the future then we have to calculate the expected price
and then take position accordingly. If the expected spot price is greater than the strike price then we
have to let the option expire because it will be not profitable for us. And if the spot price is less than
strike price we can use the option.

4. Institute of Rural Management Anand
PGDM-RM41 – Term III – End Term Examination
< Investment and Risk Management >
< 6 APRIL 2021 >
<Nidhi Tulsyan, P41088 >
Page 4 of 10

5. Institute of Rural Management Anand
PGDM-RM41 – Term III – End Term Examination
< Investment and Risk Management >
< 6 APRIL 2021 >
<Nidhi Tulsyan, P41088 >
Page 5 of 10

6. Institute of Rural Management Anand
PGDM-RM41 – Term III – End Term Examination
< Investment and Risk Management >
< 6 APRIL 2021 >
<Nidhi Tulsyan, P41088 >
Page 6 of 10

7. Institute of Rural Management Anand
PGDM-RM41 – Term III – End Term Examination
< Investment and Risk Management >
< 6 APRIL 2021 >
<Nidhi Tulsyan, P41088 >
Page 7 of 10

8. Institute of Rural Management Anand
PGDM-RM41 – Term III – End Term Examination
< Investment and Risk Management >
< 6 APRIL 2021 >
<Nidhi Tulsyan, P41088 >
Page 8 of 10

9. Institute of Rural Management Anand
PGDM-RM41 – Term III – End Term Examination
< Investment and Risk Management >
< 6 APRIL 2021 >
<Nidhi Tulsyan, P41088 >
Page 9 of 10

10. Institute of Rural Management Anand
PGDM-RM41 – Term III – End Term Examination
< Investment and Risk Management >
< 6 APRIL 2021 >
<Nidhi Tulsyan, P41088 >
Page 10 of 10
ANS 6-B-
The advantage of raising equity capital through the rights issue than the follow-on public offering
(FPO).
In the rights issue the additional offerings are made to only the existing shareholders. So there is
not much change in the ownership pattern of the company. But in FPO shares are issues to the
public and there is major change in the ownership format of the company.
Rights issue is also much easier process than FPO, the company can spare additional costs and
time that is utilized by FPO in the additional relevant tasks.
Rights issues encourage the subscription by giving more discount percentage than FPO so as to
save the taxes of the existing shareholders.
Rights issue is more profitable to the company than FPO due to lesser costs and more profit.
Share allotment is guaranteed in rights issue while in FPO it is not guaranteed.
ANS 5- B-
Until the regulative reform adopted once the money crises of 2007-2008, MTM was a particular
distinction between the long run and therefore the forward. Most OTC advance and swaps had not a
political candidate daily settlement value before these reforms, therefore customers ne'er knew their
daily amendment except within the variety of a theory. Future markets area unit subject to the
official daily exchange settlement value. The methodologies area unit totally disclosed within the
contract specifications and within the exchange rules, whereas contracts might have completely
different closing formulas and daily settlement formulas.