Questions 5

                                                            Management of Derivatives

             Part A  (Marks –4 for each question) Answer any five questions.

1.Illustrate a synthetic derivative.

2.What is a credit default swap?

3.What is an inverse floater?

4.Distinguish between options and futures.

5.What are catastrophe bonds?

6.Describe convertible bonds.

7.What is an option Greek?

           Part B (Marks -  8 for each question) Answer any four questions.

1.You purchased an FRA (6M by 12M ) to pay 9% fixed interest against receipt of MIBOR + 4%

  On the settlement day, MIBOR was 6% p.a. How do you settle this FRA?

2.A portfolio consists of 3 scrips with weights of 0.25, 0.50 and 0.25. The betas respectively are 2, 1.2 and 0.8. What is portfolio’s beta?

3.If on a stock with market price Rs 270, a call option is purchased with premium Rs.29 and a strike price of Rs.270, what is the option’s time value?

4.If a put option is written with strike price Rs.160 when the market price is Rs.150, expiring in 3 months and premium Rs.12, what is the maximum loss on expiry for the writer?

5.An option has a delta of 0.5. If there is a Rs.4 change in the price of underlying asset, what is the change in price of option?

6.An investor has 2 option positions, one with delta of  minus 0.4 and the other with delta of 0.9. What is the delta of the portfolio?

               Part C (Marks – 8) Answer both C1 and C2.

C1.What are the five factors which determine option premium?

C2.You have bought a call option and a put option , both with strike price Rs.110. Premiums are Rs.8 and Rs.6 respectively. On the expiry day (common for both), market price is Rs.112. What is your profit or loss?                                                  

Questions 4

Derivatives

                                                                                                    Total Marks: 60

Part  A:  Answer any five questions out of seven. Each question carries 4 marks.

1)    Define a derivative. Why do we use derivatives?

2)    What is the difference between an European Option and an American Option?

3)    What is an option Greek? Define Rho.

4)     Distinguish between arbitrage and speculation.

5)    How is ‘in the money option’ different from ‘out of the money option’?

6)    What is the difference between a forward contract and a futures contract?

7)    What is an interest rate swap? 

Part  B : Answer any four questions out of six. Each question carries 8 marks.

1)    The beta of A’s portfolio vis-à-vis the BSE Sensex is 0.5. One month futures contract on the BSE Sensex is trading at Rs.33,000. Contract size is 50. A looks for perfect hedge and enters into two contracts in index futures. What is the size of A’s portfolio?

2)    What should be the approximate value of a 6 months forward contract of a share if it is quoting in the cash market at Rs.300? The share is expected to declare a dividend of Rs.10 after 3 months. Assume interest rate of 10% p.a.

3)    If on a stock with a market price of Rs.450, a call option is purchased with a premium of Rs.15 and a strike price of Rs.450, what is the intrinsic value of the option?

4)    A put option is written on a share when the market price is Rs.400. Strike price is Rs.420, expiry in 3 months and premium is Rs.8. What can be the maximum loss to the writer when the option expires?

5)    X has entered into a Futures Purchase contract (3 months) at Rs.400. He has also written a Call Option for the same asset with Strike Price Rs.450, expiry 3 months, premium Rs.30. After 3 months, the market price of the asset is Rs.440. What is X’s profit or loss?

6)    X has purchased 2 call options and 3 put options for the same asset. Strike price for each call option is Rs.400, expiry 3 months, premium for each call option Rs.10. Strike price for each put option is Rs.420, expiry 3 months, premium for each put option Rs.25. Market price after 3 months is Rs.410. What is X’s profit or loss?

Part  C: This is a compulsory question carrying 8 marks.

          C1: Name the five factors which affect the value of an option.

          C2: An option has a delta of 0.7. If the price of the underlying asset changes by Rs.30, what will be the change in option’s price?

Questions 3

                                                            Derivatives

                                                                                                      Total Marks: 60

Part A: Answer any five questions out of seven. Each question carries 4 marks.

          1)What is the difference between ‘out of the money option’ and ‘in the money option’?

          2)Define  vega and delta in GreekOptions.

          3)Distinguish an option contract from a forward contract.

          4)What is an ‘inverse floater’?

          5)Define ‘arbitrage’.

          6)What are the five factors which impact the value of an option?

          7)Differentiate between a bull and a bear.

Part B: Answer any four questions out of six. Each question carries 8 marks.

          1)If on a stock with a market price of Rs.300, a 30-day call option is purchased with a premium of Rs.30 and a strike price of Rs.300, what is the time value of the option?

          2)’A’ writes a put option with strike price Rs.200 and premium Rs.25. On the expiry date, the asset is quoting at Rs.210. What is the profit or loss for A?

         3)You have purchased a call and a put option , both at a strike price of Rs.150 each. Premiums are Rs.10 and Rs.8 respectively. On the common expiry date, the asset is ruling at Rs.160. What is your net profit or loss?

         4)Anticipating bullish tendency in the market, you entered into a 1-month futures purchase of 100 shares of a particular company at a price of Rs.80 per share. You also purchased 1-month call options for 200 shares of the same company with strike price of Rs.85. After one month the price of share was Rs.82 and you just broke even. So, what was the call option premium per share? Ignore margins for futures.

        5)You bought call options for 100 shares of A Ltd. with strike price of Rs.75 and premium Rs.2 per share. You also wrote put options for 100 shares of the same company for same strike period. On expiry of these contracts, you lost Rs.50. What was the put option premium per share? Market price on the date of expiry was Rs.74.

       6)You bought 100 shares of a company at Rs.150 each when the sensex was 25,000. Beta of the share is 1.5. After one month the sensex was at 22,500. How much did you gain or lose?

Part C: This compulsory question carries 8 marks (4 + 4)

      C1: Is speculation an unmitigated evil? Defend your answer.

      C2: You purchased a call with strike Rs.100 and went short on call with strike Rs.110 for the same period. Premiums were Rs.5 and Rs.2 respectively. The price at expiry of options was Rs.115. What is your net profit or loss?

Question 2

                                                             Derivatives

                                                                                                    Total Marks: 60

Part  A:  Answer any five questions out of seven. Each question carries 4 marks.

1)    Define a derivative.

2)    What is the difference between an American Option and an European Option?

3)    What do we mean by delta and theta in the field of options?

4)    Give an example of ‘interest rate swap’ and ‘interest rate future’.

5)    Distinguish between arbitrage and speculation.

6)    How is ‘in the money option’ different from ‘at the money option’?

7)    What is the difference between a forward contract and a futures contract?

Part  B: Answer any four questions out of six. Each question carries 8 marks.

1)    The beta of A’s portfolio vis-à-vis the BSE Sensex is 0.5. One month futures contract on the BSE Sensex is trading at 24,000. Contract size is 50. A looks for perfect hedge and enters into two contracts in index futures. What is the size of A’s portfolio?

2)    What should be the approximate value of a 6 months forward contract of a share if it is quoting in the cash market at Rs.200? The share is expected to declare a dividend of Rs.5 after 3 months. Assume interest rate of 10% p.a.

3)    If on a stock with a market price of Rs.350, a call option is purchased with a premium of Rs.15 and a strike price of Rs.350, what is the intrinsic value of the option?

4)    A put option is written on a share when the market price is Rs.200. Strike price is Rs.220, expiry in 3 months and premium is Rs.8. What can be the maximum loss to the writer when the option expires?

5)    X has entered into a Futures Purchase contract (3 months) at Rs.300. He has also written a Call Option for the same asset with Strike Price Rs.350, expiry 3 months, premium Rs.20. After 3 months, the market price of the asset is Rs.330. What is X’s profit or loss?

6)    X has purchased 3 call options and 2 put options for the same asset. Strike price for each call option is Rs.400, expiry 3 months, premium for each call option Rs.10. Strike price for each put option is Rs.420, expiry 3 months, premium for each put option Rs.25. Market price after 3 months is Rs.410. What is X’s profit or loss?

Part  C: This is a compulsory question carrying 8 marks.

          C1: Name the five factors which affect the value of an option.

          C2: An option has a delta of 0.8. If the price of the underlying asset changes by Rs.8, what will be the change in option’s price

Questions 1

Management of Derivatives                                                          Total Marks 60

Part A:  Answer any four questions out of six.  Each question carries 5 marks:

1)     Define the following OptionGreeks: (a) delta, (b)gamma and (c) rho

2)    Indicate whether value of a call option will go up or down when (a) strike price increases, other factors remaining the same and when( b) time to expiry of option decreases, other factors remaining constant.

3)    Illustrate Synthetic Derivative.

4)     Distinguish between a plain vanilla option and an exotic option.

5)    Distinguish between premium and margin.

6)    What is a Credit Default Swap?

Part B:  Answer any four questions out of six. Each question carries 8 marks:

1)    If a call option on a share is purchased at a strike price of Rs.205, when market price is Rs.198, expiry in 3 months and a premium of Rs.5, what will be the maximum possible gain for the purchaser of option on expiry of this position?

2)    In the above problem, what is the maximum possible gain for the option writer?

3)    If on a stock with a market price of Rs.410, a 3-month call option is purchased with a premium of Rs.35, and a strike price of Rs.400, what is the time value of the option?

4)    An option has a delta of 0.25; if there is a Rs.4 change in the price of the underlying share, what would be the change in price of the option?

5)    Explain Interest Rate Swap.

6)    What is the difference between a Forward and a Future transaction?

Part C: This compulsory question carries 8 marks: (please answer both a and b.)

a)   What are the five determinants of the value of an option?                        

b) Describe ‘Butterfly Spread’.