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: 06/11/2015. Duration: 60Minutes Max.Marks: 20,
Name : ID No. :

1. Assume that you are a swap dealer and have just acted as a counterparty in an interest rate swap. The
notional principal for the swap was $7.5 million and you are now obligated to make five annual
payments of 8 percent interest. The floating rate that you will receive is 8.2 percent, and the floating
payments to you are annual as well. ( 5Marks)

a) If interest rates do not change over the next five years, what will be your annual net inflow?

b) What is the net present value of your swap agreement at a discount rate of 8 percent?

c) If the floating rate stays the same for the first two years and then falls by 1.5 percent, what will
be your net payments for the five years?
2. Complete the following table: ( 5Marks)

Item Bull Spread Bear Butterfly Strangle with Straddle with

with calls Spread with Spread with calls and puts calls and puts
puts calls 100call@10
100call@10 100 put@10 100call@10 100call@10 100put @7
105call@7 110put@12 105call@7 90put @5
110call@5

Portfolio of
options ie how
many and
which one long
or short
Strategy
composition

Value at
expiration

Maximum
Loss

Break Even
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. (5 Marks)
4. 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 swap rate for three years. (5 Marks)