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