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?