20th

October 2021: MOTILAL NEHRU COLLEGE

ASSIGNMENT FINANCIAL
ECONOMICS SEM V

INSTRUCTIONS: TOTAL MARKS - 20

• WORD LIMIT: FOR 2 MARKS: 200- 250 WORDS

FOR 1 MARK: 150-200 WORDS

• SUBMIT YOUR COMPLETED ASSIGNMENTS ON GOOGLE

CLASSROOM LATEST BY 7 T H NOVEMBER 2021 MIDNIGHT
(SUNDAY).

• 2 MARKS WILL BE DEDUCTED OF THOSE WHO SUBMITTED AFTER

7 T H NOVEMBER.

• ASSIGNMENT SHOULD BE HANDWRITTEN ONLY IN LEGIBLE

HANDWRITTING.

• INCLUDE GRAPHS/DIAGRAMS WHEREVER REQUIRED. MARKS

WILL BE DEDUCTED IF THERE’S NO DIAGRAM ASSOCIATED WITH
THE QUESTION.

 QUESTIONS:

1. Differentiate between the following: (2 marks each)

(A) NPV and IRR

(B) Macaulay Duration and Modified Duration (with one numerical example)

(C) Markowitz model (short note)

(D) Over-the-counter market and Exchange-traded market

(E) Capital market line and security market line

2. (Two correlated assets) the correlation p between assets A and B is 0.1 and
other data are given in the table ahead: (3 marks)

Asset Rate of return Standard deviation

A 10.0% 15%
B 18.0% 30%



(a) Find the proportions of alpha and (1-alpha) of asset B that define portfolio of A and B
having minimum standard deviation.

(b) What is the value of this minimum standard deviation?

(c) What is the expected return of this portfolio?

3. The spot price of silver is $15 per ounce. The storage costs are $0.24 per ounce
per year payable quarterly in advance. Assuming that the interest rate is 10%
per annum for all the maturities, calculate the futures price of silver for
delivering in 9 months. Explain the arbitrage opportunities when the price is
not equal to the theoretical price. (2marks)

4. (a) Under what circumstances are (1) a short hedge and (2) a long hedge
appropriate? (2marks)

(b) Explain what is meant by basis risk when the futures contracts are used for
hedging. (1mark)

5. Explain the six factors that affect stock option prices. (2marks)