ID: …………………………........................... Name: ………………………………………………….

BIRLA INSTITUTE OF TECHNOLOGY AND SCIENCE, PILANI

SECOND SEMESTER 2014 – 2015
Comprehensive Examinations
Part – A (Open Book)
Course No : FIN F 311/ECON F354 Maximum Marks: 20.00
Course Title : Derivatives and Risk Management Weightage : 20%
Date : 14/05/2015(AN) Duration : 90 mints
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1. An investment bank has the following portfolio-A of OTC options with the same underlying.

Option Position (no. of options held, Delta Gamma Vega

long or short)

Call -1000 0.50 2.2 1.8

Call -500 0.80 0.6 0.2

Put -2000 -0.40 1.3 0.7

Call -500 0.70 1.8 1.4

A traded option Z is available with delta = 0.6, gamma = 1.5 and Vega = 0.8. A traded option Y is also
available with delta of 0.1, gamma of 0.5 and Vega of 0.6.

(a) Calculate the delta, gamma and Vega of portfolio-A. (1 Marks)

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(b) What position in Z, underlying asset and portfolio-A would make the overall portfolio both gamma and
delta neutral? (2 Marks)

(c) What position in Z, underlying asset and portfolio-A would make the overall portfolio both Vega and
delta neutral? (2 Marks)

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(d) What position in Z, underlying asset and Y together with portfolio-A would make the overall portfolio
gamma, Vega and delta neutral? (3 Marks)

2. Zero coupon bond prices (FV-100) are given as under (use continuous compounding only):

B(0,1)=90.91 B(0,2)=75.61 B(0,3)=57.87 B(0,4)=40.96 B(0,5)=26.93

Find the forward rates. ( 1 Marks)

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Find the swap rate for three years. (2 Marks)

Just after settlement of cash settlement at the end of first year the yield to maturity increases by 0.5% across all
the maturities, You are requested to find out the value of swap contract in such a situation after one year.
(3 Marks)

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 3. Mr. John wants to lock his fund for five years but he is not interested to get intermittent cash flows for two
reasons- one he is quite busy person and second he does not want to carry reinvestment risk. Unfortunately,
he could find only coupon carrying bonds in the market. He chooses a 10% coupon (payable p.a.) bond with
5 years maturity and with yield of 8% p.a. and another with 5% coupon (payable p.a.) bond with 5 years
maturity and with yield of 10% p.a. Given this background you are required to answer following with proper
calculations:
How can he construct a five year zero coupon bond with these bonds to meet his requirements? Give the
steps/ financial instruments position involved. (2 Marks)

Draw the cash-flow diagram of strategy followed. (1 Marks)

Q31. Given the following information for an economy,

Calculate the price of bond created synthetically. (1 Marks)

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What will be effective yield of synthetic? (2 Marks)

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