CASE STUDY Table 2 Call Price (INR) Put Price (INR) 58.10 179.85 On November 1, 2008, Akhil, the manager of Bharat Funds, was contemplating how he could provide positive returns to the share- holders of the fund. He decided to use options when the market was highly volatile, and through covered call writing and portfolio insurance strategies, he was able to provide better returns that what would have been possible if he had not used the options. By July 1, 2009, the Indian market had bounced back. The Nifty index had reached 4,291 from 3,033, an increase of 41.47% over six months. It was expected that the Indian market was likely to go up further, and Akhil was wondering how he could use options to generate higher returns. He was not sure whether the options were priced efficiently in the market and wanted to arbitrage, if such an opportunity was available. He collected information on index options as of July 1, 2009 (shown in Table 1). The risk-free rate was estimated to be 15%, and the contract multiplier was 50. The exercise date was July 30, 2009. 132.40 71.75 Exercise Price (INR) 1,680 1,710 1,740 1,770 1,800 1,830 133.00 84.80 99.70 108.00 96.00 82.70 116.20 149.35 Table 1 Tata Steel Share price on July 1, 2009: INR 390.65; Contract size: 764; Option exercise date: July 30, 2009. The index options are shown in Table 3. Exercise Price (INR) Call Price (INR) Put Price (INR) Table 3 500.65 59.95 420.65 348.40 Exercise Price (INR) Call Price (INR) 3,900 4,000 4,100 4,200 4,300 Put Price (INR) 82.70 110.35 144.50 370 37.10 27.00 283.70 380 32.40 32.00 224.05 186.35 390 28.65 39.00 4,400 174.70 236.55 400 23.90 44.40 The major investment for Bharat fund includes investments in 410 20.15 46.75 the SBI and Tata Steel. There are options available on these stocks, 420 16.55 52.90 and the details are provided here. State Bank of India The index options are European options, and the average dividend yield on the index is 4%. The Tata Steel options and Share price on July 1, 2009: INR 1,745; Contract size: 132; Option SBI options are American options. Tata Steel is expected to pay exercise date: July 30, 2009. The index options are shown in Table 2. dividends of 2% on July 10 and the SBI is not expected to pay any dividends before July 30. Discussion Question 1. You are required to identify whether there are any opportunities for arbitrage profit to be made in these options. CASE STUDY Table 2 Call Price (INR) Put Price (INR) 58.10 179.85 On November 1, 2008, Akhil, the manager of Bharat Funds, was contemplating how he could provide positive returns to the share- holders of the fund. He decided to use options when the market was highly volatile, and through covered call writing and portfolio insurance strategies, he was able to provide better returns that what would have been possible if he had not used the options. By July 1, 2009, the Indian market had bounced back. The Nifty index had reached 4,291 from 3,033, an increase of 41.47% over six months. It was expected that the Indian market was likely to go up further, and Akhil was wondering how he could use options to generate higher returns. He was not sure whether the options were priced efficiently in the market and wanted to arbitrage, if such an opportunity was available. He collected information on index options as of July 1, 2009 (shown in Table 1). The risk-free rate was estimated to be 15%, and the contract multiplier was 50. The exercise date was July 30, 2009. 132.40 71.75 Exercise Price (INR) 1,680 1,710 1,740 1,770 1,800 1,830 133.00 84.80 99.70 108.00 96.00 82.70 116.20 149.35 Table 1 Tata Steel Share price on July 1, 2009: INR 390.65; Contract size: 764; Option exercise date: July 30, 2009. The index options are shown in Table 3. Exercise Price (INR) Call Price (INR) Put Price (INR) Table 3 500.65 59.95 420.65 348.40 Exercise Price (INR) Call Price (INR) 3,900 4,000 4,100 4,200 4,300 Put Price (INR) 82.70 110.35 144.50 370 37.10 27.00 283.70 380 32.40 32.00 224.05 186.35 390 28.65 39.00 4,400 174.70 236.55 400 23.90 44.40 The major investment for Bharat fund includes investments in 410 20.15 46.75 the SBI and Tata Steel. There are options available on these stocks, 420 16.55 52.90 and the details are provided here. State Bank of India The index options are European options, and the average dividend yield on the index is 4%. The Tata Steel options and Share price on July 1, 2009: INR 1,745; Contract size: 132; Option SBI options are American options. Tata Steel is expected to pay exercise date: July 30, 2009. The index options are shown in Table 2. dividends of 2% on July 10 and the SBI is not expected to pay any dividends before July 30. Discussion Question 1. You are required to identify whether there are any opportunities for arbitrage profit to be made in these options