Visvesvaraya Technological University (VTU) 2008-4th Sem M.B.A - - Question Paper

Company Price / Share (Rs.) Market capitalization
(Rs. crores)
A 72 50
B 115 250
C
1)
425
48
350
75
E 220 275
The subsequent dividends per share are expected
A - Rs.5/-, 30 days from now
B - Rs.15/-, 45 days from now
C - Rs.20/-, 60 days from now
C and D are not expected to pay any dividend. The risk free rate of return
continuously compounded is 10% per annum. calculate the price of a future contract
on the index with 6 months to maturity. (10 Marks)
5 a. What is basis risk? (03 Marks)
h. Sun pharma wishes to borrow Rs.20 crore at a fixed rate for five years and has been
offered either 11% fixed or six-month LIBOR + 1%. CIPLA Ltd. wishes to borrow
Rs.20 crore at a floating rate for five years and has been offered either six-month
LIBOR 0,5% or 10% fixed. On the basis of above figures:
i) How may they enter into swap arrangement in which every benefits equally?
ii) What risk may this arrangement generate? (07 Marks)
c. two firms A and B face the subsequent interest rates.
$ £
A
B
8 .0%
1 0 .0 % 11.0%
A wants to borrow in £ and B on S. Exchange rate is $ 1.5 / E. discuss how a
currency swap can be constructed. (10 Marks)
6 a. What do you mean by a strip and a strap? When are these strategies adopted?
(03 Marks)
b. A stock is currently selling for Rs.400. The price of call choice expiring 6 months
are as follows:
Strike price = Rs.350, call price = Rs.15
Strike price = Rs.390, call price = Rs.1 I
Strike price = Rs.425. call choice = Rs.8
Investor feels it is unlikely that stock price will move significantly in next six
months. Draw a butterfly spread with the provided choices. ( 07 Marks)
11.6%
Contd...3
Page No...3 MBA4F7
6 c. The subsequent call choices are traded in the market at current with the identical maturity
choice Exercise Price Call Premium
1 Rs.60 Rs.7
2 Rs.75 Rs.5
3 Rs.90 Rs.4
discuss how an investor can create a butterfly spread using the above choices. Draw
his pay off diagram. discuss his profit / loss if the spot price at maturity is i) Rs.55
ii) Rs.70 iii) Rs.80 and iv) Rs.95. (10 Marks)
7 a. What is rolling forward of a hedge? (05 Marks)
b. From the subsequent data, compute the values of call and put choices using Back and
Scholes model:
Current price of the share = Rs.486
Exercise price = Rs.500
Time of expiration = 65 days
Standard deviation = 0.54
Continuously compounded
Rate of interest) = 9% per annum
Dividend expected = Nil
8 Case Study
(15 Marks)
You have a 12 months DM, 1,00,000 payable. The current Rs. / DM spot rate is Rs.20.
Re. Interest rate is 21% pa and DM interest rate is 10% pa. You are considering a
forward hedge at current forward rate of Rs.22/DM. A friend tells you that he recently
bought a call on DM 1,00,000 at a strike price of Rs.20 and is willing to sell it to you at
historic premium of Re 1/DM or Rs.1,00,000 for the entire contract. The call matures at
the identical time as your payable and is an European call.
Analyze the different choices available. choose the best choice. Also substantiate your
answer. (20 Marks)

Earning:   Approval pending.