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’.