Investments - a Money Market Fund with an Average Maturity of 30 Days Offering a Current Yield of 6% Per Year

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Investments

1. You have Rs.50,000 to invest for the next year and are considering three alternatives:

a) A money market fund with an average maturity of 30 days offering a current yield of

6% per year.

b) A 1-year savings deposit at a bank offering an interest rate of 7.5%.

c) A 20-year Indian G-Sec offering a yield to maturity of 9% per year.

2. What is the standard deviation of a random variable q with the following probability

distribution:

Value of q Probability

0 .25

1 .25

2 .50

3. Consider a risky portfolio. The end-of-year cash flow derived from the portfolio will

be either Rs.70,000 or Rs.2,00,000 with equal probabilities of .5. The alternative riskfree investment in T-bills pays 6% per year.

4. On 13 April 2009, one finds the following quotations on aluminum futures from

MCX, with 30 June, 2009 maturity: Price: Rs.78.35 per kg.

The trading unit is 5 tons. The initial margin is 5%. The spot price of aluminum on this

day is Rs. 72.4. The delivery unit is 10 kg, and the delivery center is Bhiwandi.

Show how a trader, holding long position in this futures contract, will be affected by 10%

increase in prices of aluminum. What about a trader with short position in the contract?

Explain why the futures contract is a zero-sum game?

5. An investor wants to invest Rs.68 million in the Indian stock market for 3 months and

decides to use Nifty futures contract as substitute for the actual holdings. The index

closed at 3,400 points today. At present, each Nifty futures contract controls 50

(contract multiple) times the current level of Nifty worth of stocks.

6. Why is it harder to assess the performance of a hedge fund portfolio manager than

that of a typical mutual fund manager?

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