Question Paper

Exam Date & Time: 21-Aug-2020 (02:00 PM - 05:30 PM)

BMS COLLEGE OF ENGINEERING

Autonomous Institute Affiliated to VTU
August 2020 Semester End Main Examinations

INSTRUCTIONS: PART- A: Students will have to answer any SIX questions.

PART- B: Students will have to answer any FIVE questions.
PART- C: Is Compulsory. Show all working notes clearly.
Derivatives [18MBA4FFDR]
Marks: 100 Duration: 210 mins.

PART - A
Answer 6 out of 8 questions.

1) Discuss the important economic functions performed by derivatives market. (5)

2) The risk free interest rate is 10% per annum with continuous compounding and that the dividend yields on a stock index is 4% per annum. The index is standing at 400, and the (5)
future price for a contract deliverable in four months is 405. What arbitrage opportunities does this create?
3) Consider Triple Aces call option with an Rs 25 strike price. The following table contains historical values for these options at different stock price. (5)

Create a table which shows:

a)Stock price b) Strike price c) Intrinsic value d) Option price and e) The time value
4) Swaps are an essential part of modern finance. Explain (5)
5) Suppose that the spot (zero) interest rate with continuous compounding are as follows (5)

Calculate Forward rate for the second , third, fourth and fifth years
6) "Options and futures are zero-sum games". Explain this statement (5)
7) Suppose that the standard deviation of quarterly changes in the price of a commodity is (5)

0.81, and the coefficient of correlation between the two

changes is 0.8. What is the optimal hedge ratio for a three month contract? What does it mean?
8) Greeks give traders a theoretical way to judge their exposure to various options pricing inputs. Discuss (5)
PART - B
Answer 5 out of 7 questions.

9) "Coronavirus Rattles Commodity Markets" Justify the statement. (10)

10) Mr. Sam has shorted five copper futures at an exercise price of Rs 325 per kg. The initial margin of the contract is 15% and the maintenance margin is 80% of initial margin. The (10)
future prices of the first five days of the contract are given below.

Prepare a margin account of the investor assuming that all margin calls are honoured immediately and lot size of the contract is 1000 kg.
11) The current market price of a share is Rs 60 and it is believed that at the end of one month the price will be either Rs 66 or Rs 54. The risk free rate of interest is 15% per annum. (10)
A call option is available with an exercise price of Rs 63.
Use the binomial option pricing model:
a)Determine the value of the call option
b)Determine the hedge ratio
12) Company A and B offered the following rates per annum on a $20 million five year loan: (10)

Company A requires a floating rate loan; company B requires a fixed rate loan. Design a swap that will net a bank, acting as intermediary, 0.1% per annum and that will appear
equally attractive to both companies.

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13) The yield of a bond that last for 2 years is 15% p. a. Face value of the bond is Rs.100 and annual coupon rate is 11.50%. The Six months, one year and one and half year zero (10)
rates are 10%, 11% and 12% p.a. respectively. Calculate the two year zero rates assuming that all rates are quoted with semi-annual compounding.
14) Future Contract are improvised forward contract". Do you agree explain. (10)
15) Mr Suresh buy a January call option on Bank's stock, with an exercise price of Rs.50/-. (10)

PART - C
Answer all the questions.

16) Benson is interested in purchasing a European call option on Dabur Ltd, a non- dividend paying stock, with a strike price of Rs.100/- and two years until expiration . Dabur Ltd is (20)
currently trading at Rs.100/- per share and the annual; variance of its continuously compounded rate of return is 0.04. The treasury bill that matures in two years yield a
continuously compounded interest rate of 5% per annum.

i) Use the Black Scholes Model to calculate the price of the call option that Benson is interested in buying?
ii)What does the put call parity imply about the price of the put, with the strike price of Rs.100/- and two years until expiration?
iii)State the assumption of Black & Scholes Model.

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