QUESTION 28 X Inc enters into a contract to buy 1,000 equity shares of

QUESTION 28 X Inc enters into a contract to buy 1,000 equity shares of A Inc from one of its shareholders Mr. S @ $. 100 per share. Delivery of shares to be given after 3 months. Current market price of such shares is $ 125. Mr. X pays the forward price upfront. X Inc could buy one lot of call option with $ 100 strike price at a call premium of $ 55. Is the transaction a derivative?

Based on the given information, the transaction can be considered as a derivative. Here's the calculation:

X Inc enters into a contract to buy 1,000 equity shares of A Inc from Mr. S at $100 per share.
Forward price paid by X Inc = 1,000 shares x $100 per share = $100,000
Current market price of shares = $125 per share
Value of shares at the end of 3 months = 1,000 shares x $125 per share = $125,000
Profit for X Inc = $125,000 - $100,000 = $25,000

Since the contract involves the purchase of shares at a future date based on a predetermined price, it is considered as a forward contract and hence a derivative. Additionally, X Inc could buy a call option with $100 strike price and a call premium of $55, which is also a type of derivative.

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