Deemed University 2011 M.B.A University: Lingayas University Term: VI Title of the : Financial Derivatives - Question Paper
Roll No. ..
Lingayas University
MBA 2nd Year (Term VI)
Examination May 2011
Financial Derivatives (BA - 238)
[Time: 3 Hours] [Max. Marks: 100]
Before answering the question, candidate should ensure that they have been supplied the correct and complete question paper. No complaint in this regard, will be entertained after examination.
Note: Attempt five questions in all. All questions carry equal marks. Select two questions from Section A and two questions from Section B. Question no. 8 (Section C) is compulsory.
Section A
Q-1. (a) Discuss the termination of a position in Forward contract prior to expiration with the help of an example. [10]
(b) Assume you bought a 60-days call option on 90-days LIBOR with a notional amount of $1 million and a strike rate of 5%. Compute the payment that you will receive if 90-days Libor is 6% and 4.5% at contract expiration respectively and determine when the payment will be received. [10]
Q-2. (a) Discuss the margin mechanism of the Future market. [10]
(b) Explain the Put Call parity theorem. [10]
Q-3. Explain any two Strategies with example from the following:
(i) Collar Strategy
(ii) Long straddle
(iii) Bull call spread
(iv) Bull back spread [210=20]
Section B
Q-4. (a) Discuss the interest rate swaps with the help of an example. [10]
(b) Consider an FRA that:
Expires/settles in 30 days
Is based on a notional principal amount of $2million
Is based on 90 days LIBOR
Specifies a forward rate of 5%
Assume that the actual 90 days LIBOR 30-days from now is 6%. Compute the cash settlement payment at expiration, and identify which party makes the payment. [10]
Q-5. (a) Discuss the interest rate Cap & Floor. [10]
(b) You have $50,000 to invest and you believe the price of copper is about to rise. Shares in a copper mining company cost $15.50 each. A December copper futures contract (traded on Cmx. Div. NYM with each contract for 25,000 lbs of copper) is priced at 81.52 cents per lb.
Assume an initial margin of 10% of contract value.
(i) What are you going to do?
(ii) In seven days time, the shares are priced at $15.97 and the December futures contract in copper is priced at 81.84 cents per lb. Calculate your profit from your answer to (i). [10]
Q-6. (a) The share price of Batty Electronics, today, is $6.10. The current interest rate (compounded annually) is 5% and the volatility over the next month has been estimated at 0.3. Calculate: (i) the up and down factors, u and d, for movement in the share price over the next month, (ii) the value of a one-month put option on Batty shares with strike price $6.20. [10]
(b) Discuss the characteristics of the future market. [10]
Q-7. Jack has been looking at the share price of a German brewery. Today the price of a share in the brewery is Rs 14.50 and the rate at which Jack can borrow and invest money is 6.5% per year (continuously compounded). A call option on one share with maturity one month and strike price Rs 14.00 costs Rs 1.50. A put option with the same maturity and strike price costs Rs 0.91. Is there any arbitrage opportunity if yes discuss that. [20]
Section
C
Q-8. The price today of an Electro Max share is Rs 5.50.
(a) Calculate the value of
(i) a three-month call option (strike price = Rs 5.20),
(ii) a three-month put option (strike price = Rs 5.20) on Electro Max shares.
Assume the interest rate is 6% (compounded continuously) and volatility is estimated at 20%.
(b) Arnold has the idea that Electro Max shares will fall in value. He has Rs 10,000 to invest. Consider two investment schemes:
(i) Borrow 1818 Electro Max shares (10000/5.5 = 1818.2). Sell these shares at Rs 5.50 each. (This is known as short selling)
(ii) Spend all the Rs 10,000 buying three-month put options on Electro Max shares.
In three months time, the value of an Electro Max share was Rs 5.10. Calculate the profit Arnold would have made from each of these schemes. [20]
| Earning: Approval pending. |
