Birla Institute of Technology & Science (BITS), Pilani.

Course No.: FIN F 311/ECON F354 Ist Semester, 2015-16, Midsem Examination (Part-B)
Course Title: Derivatives and Risk Management Date: 07/10/2014. Duration: 60Minutes Max.Marks: 20,
Name : ID No. :

1. Why is the expected loss from a default on a interest rate swap less than expected loss from the default on
a loan with the same principal? Marks 1

2. Given the butterfly position below, answer questions a to d:

Long 1 XYZ 90 put@ $ 1.45
Short 2 XYZ put@ $ 2.80
Long 1 XYZ 100 put@ $ 5.30
a. What are break even points?
b. What is the maximum potential profit and maximum potential loss?
c. Prepare Profit and loss diagram.
d. What will be profit/ loss of this butterfly with stock at $ 97 at expiration? 4 Marks
3. Consider a binomial world in which the current stock price of 80 can either go up by 10 percent or down
by 8 percent. The risk-free rate is 4 percent p.a.. Assume a one-period world and continuous
compounding. What is the call and put option price with strike price of 80. 7 Marks
4. The bonds of different maturity are trading at following prices on 01.04.2015:
a. One Year Maturity bond: $91.32
b. Two Years Maturity bond: $84.17
c. Three Years Maturity bond: $77.75
d. Four Years Maturity bond: $71.89

Find the price (in terms of fixed rate) of a four years swap with a notional principal of $25million.
8 Marks