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

BIRLA INSTITUTE OF TECHNOLOGY AND SCIENCE, PILANI

SECOND SEMESTER 2015 – 2016 Mid-Semester Examination
Part –A (Open Book)
Course No : FIN F 311/ECON F354 Maximum Marks: 20.00
Course Title : Derivatives and Risk Management Weightage : 20%
Date : 18/03/2016 Duration : 90 mints
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Question 1 to 10 carries 1 mark each. There is no negative mark for wrong answer. Write your answer in the
table given here under:
 
1. A bond's price volatility _________ at a/an _________ rate as maturity increases. 
A. increases; increasing B. increases; decreasing
C. decreases; increasing D. decreases; decreasing

2. An increase in a bond's yield to maturity results in a price decline that is ________ the price increase
resulting from a decrease in yield of equal magnitude. 
A. greater than B. equivalent to C. smaller than D. The answer is indeterminate
3. A rise in Government securities prices will make yield curve
a. Slope upward b. Shift downward c. Remain stable d. Shift upward
4. In futures trading initial margin is paid by .
a. buyer only b. clearing member c. Sellers only d. Buyer and seller both.
5. Holding other factors constant, which one of the following bonds has the smallest price volatility?
a. 5-year, 6% coupon bond
b. 5-year, 12% coupon bond
c. 6 year, 14% coupon bond
d. 6-year, 6% coupon bond
e. Cannot tell from the information given.

6. All other things equal, a bond's duration is _________. 

A. higher when the coupon rate is higher B. lower when the coupon rate is higher
C. the same when the coupon rate is higher D. indeterminate when the coupon rate is high

7. Which of the following set of conditions will result in a bond with the greatest price volatility? 
A. A high coupon and a short maturity. B. A high coupon and a long maturity.
C. A low coupon and a short maturity. D. A low coupon and a long maturity.

8. An investor who expects declining interest rates would maximize their capital gain by purchasing a bond
that has a ___ coupon and a ___ term to maturity. 
A. low; long B. high; short C. high; long D. zero; long
 

9. All other things held constant, premiums on both put and call options will increase when the

A) exercise price increases. B) volatility of the underlying asset increases.

C) term to maturity decreases. D) futures price increases.

10. An increase in the exercise price, all other things held constant, will _____ the premium on call options.
A) increase B) decrease C) increase or decrease D) Not enough information is given.
1. The prices of the XYZ Jan 95/100/105/110 put option are as under:
a. Jan 2012 95 put $1.00
b. Jan2012 100 put $4.00
c. Jan2012 105 put $9.50
d. Jan2012 110 put $14.50

You are require to construct a put condor with the abovementioned puts and also show that this put condor
can be synthetically created by two different butterflies constructed out of these puts.

2. Consider a two-period state for Binomial Option pricing model. Let the current stock price be 45 and risk free
rate be 5%. Each period the stock price can go either up by 10 % or down by 10%. A call option expiring at
the end of the second period has an exercise price of 40. You are required to:
a. Determine stock price sequence.
b. Determine the possible prices of the call at expiration
c. Determine the possible prices of the call at the expiration of first period.
d. Determine the current price of the call.
e. Determine the initial hedge ratio. (2x4=8Marks)