Theory Questions

1. Explain the factors affecting the price of a stock option?

2. Define Forward and Futures contract? Distinguish between the sae with illustrations
!. Differentiate between call and put options? "hat are the rights and obligations of long and
short positions in the?
#. $ow are %naked& calls different fro %co'ered& calls? "hat iplications do both the types of
calls ha'e in respect of the argins to be kept?
(. Explain the difference between spreads and cobinations. )i'e at least two exaples?
*. "hat are deri'ati'es? +Future ,ontracts are ipro'ised forward contracts- .Do you agree/
Explain?
0. "hat is the difference between / 1ong forward position and a short forward position?
2. "hat is the difference between / 1ong stock short/call and 1ong stock long/put
3. "hat is the difference between / hedging4 speculation and arbitrage?
15. "hat is the difference between / entering into a long forward contract when the forward
price is 6(5 and taking a long position in a call option with strike price of 6(5?
11. Distinguish between the ters open interest and trading 'olue?
12. "hat is the difference between local and a coission broker?
1!. Explain how the argin protects in'estors against the possibility of default?
1#. Explain the assuptions underlying the 7lack/8choles 9odel
1(. Explain the different types of option spread strategies with diagras
:uericals Questions
1. ;ou are gi'en below inforation on soe options. 8tate whether each one of the is in/
the/oney4 out/of/the/oney or at/the/oney.
8l.:o <ption 8tock price =6> Exercise price =6>
1. ,all (2 ((
2. ,all #5 #5
!. ?ut 112 155
#. ?ut 15# 115
(. ?ut 12 1(
*. ,all !0 !(
2. Fro the following data 4 deterine for each option4 the intrinsic 'alue and the tie
'alue.
8l.:o <ption 8tock price =6>Exercise price=6> <ption ?rice=6>
1. ?ut !* !2 (.!5
2. ,all #2 (5 #.15
!. ,all 150.(5 15( 2.#5
#. ?ut #1 #( 3.05
!. @n in'estor purchases a call option on 1255 shares with an exercise price of 625 for 60.0(.
"hat is the axiu loss that he could possibly incur on this? "hat is the axiu profit
which could accrue to hi? @lso4 deterine the 7E/point4 drawing suitable diagra?
#. @n An'estor recei'es a su of 61255 in one year&s tie for an in'estent of 61555 now.
,alculate the annual copounding =B>return withC a>.@nnual b>. $alf/yearly c>.
Quarterly d>. 9onthly and e>. ,ontinuous copounding
(. @ssue that a arket .capitaliDation weighted index consists of fi'e stocks only. ,urrently4
the index stands at 3054 obtain the price of a futures contract4 with expiration in 11( days4 on
this index ha'ing reference to the following additional inforationC =i>. Di'idend per share
of 6* expected on share/7 25 days fro now.=ii>. Di'idend per share of 6! expected on
share/E 22 days fro now =iii>.,ontinuously copounded risk/free return E 2B p.a. =i'>.1ot
siDeE!55 ='>.<ther inforationC
,opany 8hare ?rice =6> 9arket capitaliDation =in illions of 6>
@ 22 115
7 2( 105
, 12# !02
D (# 21*
E 2( 255
*. @ trader enters into a short cotton futures contract when the futures price is (5 cents per
pound. The contract is for the deli'ery of (54555 pounds. $ow uch does the trader gain
or loss if the cotton price =per pound> at the end of the contract is =i>. #2.25 cents and =ii>.
(1.!5 cents
0. @ trader sells a European call on a share for6#. The stock price is 6#0 and the strike price is
6(5. Fnder what circustances the trader does akes a profit? Fnder what circustances
will the option contract be exercised? Draw a diagra showing the 'ariation of the trader&s
profit with the stock price at aturity of the option?
2. 8uppose that you enter into a short futures contract to sell Guly sil'er for 6(.25 per ounce on
the :;,E. The siDe of the contract is (555 ounces. The initial argin is 6#4555 and the
aintenance argin is 6!4555. "hat change in futures price will lead to a argin call?
"hat happens if you do not eet the argin call?
3. @ one/year long forward contract on a non/di'idend paying stock is entered into when the
stock price is 6#5 and the risk/free rate of interest is 15B per annu with continuous
copounding. "hat is the forward price and the initial 'alue of the forward contract? =ii>.
8ix onths later4 the price of the stock is 6#( and the risk free interest rate is still 15B.
"hat are the forward price and the 'alue of the forward contract?
15. <n Guly 14 25534 a copany enters into a forward contract to buy 15 illion Gapanese yen
on Gan 14 2515. <n 8epteber 14 2553 it enters into a forward contract to sell 15 illion
Gapanese yen on Ganuary 14 2515. Describe the pay/off fro this strategy?
11. @ copany has a 625 illion portfolio with a beta of 1.2. At would like to use futures
contracts on the 8H? (55 to hedge its risk. The index is currently standing at 15254 and each
contract is for deli'ery of 62(5 ties the index. "hat is the hedge that iniiDes risk?
"hat should the copany do if it wants to reduce the beta of the portfolio to 5.*?
12. ,opanies I and ; ha'e been offered the following rates per annu on a 6( illion
in'estent.
Fixed rate Floating rate
,opany/I 2.5B 1A7<J
,opany/y 2.2B 1A7<J
,opany/I reKuires a fixed rate in'estent and ,opany/; reKuires a floating rate
in'estent. Design a swap that will net a bank4 acting as interediary4 5.2B p.a. and will
appear eKually attracti'e to I and ;.
1!. @ 6 155 illion interest rate swap has a reaining life of 15 onths. Fnder the ters of
swap4 six/onth 1A7<J is exchanged for 12B per annu =copounded seiannually>. The
a'erage continuous copounding rate applicable is 15B per annu. The six/onth 1A7<J
rate was 3.*B per annu two onths ago. "hat is the 'alue of the swap to the party paying
floating?
1#. ,onsider the following inforation with regard to a call option on the stock of @7, ,o.
,urrent stock price of the shares/ 61254 Exercise price of the optionE611(4 Tie period to
expirationE! onths4 8tandard De'iation of the distribution of continuously copounded
rates of returnE5.* and continuously copounded risk/free rate of returnE15B. Deterine
the 'alue of the ,all using 7lack/8choles forula.