Question 1

The current market price of an equity share of Penchant Ltd is Rs. 420. Within a period of 3 months, the
maximum and minimum price of it is expected to be Rs. 500 and Rs. 400 respectively. If the risk free rate
of interest be 8% p.a., what should be the value of a 3 months Call option under the “Risk Neutral”
method at the strike rate of Rs. 450? Given e0.02 = 1.0202

Question 2

The stock of a company is currently quoted in the market at Rs.150. The price of the stock is expected to
go up or down by 10% in next one year and by 15% in the second year. The risk-free interest rate in the
economy is 6%.

Required :

Using two-step Binomial Model, find out the price of a 2-year American put option on the company's
stock with strike price of Rs. 170.

Question 3

Mr. Dayal is interested in purchasing equity shares of ABC Ltd. which are currently selling at Rs. 600 each.
He expects that price of share may go upto Rs. 780 or may go down to Rs. 480 in three months. The
chances of occurring such variations are 60% and 40% respectively. A call option on the shares of ABC
Ltd. can be exercised at the end of three months with a strike price of Rs. 630.

(i) What combination of share and option should Mr. Dayal select if he wants a perfect hedge?

(ii) What should be the value of option today (the risk free rate is 10% p.a.)?

(iii) What is the expected rate of return on the option?

Question 4

From the following data for certain stock, find the value of a call option:

Price of stock now = Rs.80

Exercise price = Rs.75

Standard deviation of continuously compounded annual return = 0.40

Maturity period = 6 months

Annual interest rate = 12%

Given

Number of S.D. from Mean, (z) Area of the left or right (one tail)

0.25 0.4013
0.30 0.3821

0.55 0.2912

0.60 0.2743

e 0.12x0.5 = 1.062

In 1.0667 = 0.0646

Question 5

Mr. X established the following spread on the Delta Corporation’s stock:

(i) Purchased one 3-month call option with a premium of Rs. 30 and an exercise price of Rs. 550.

(ii) Purchased one 3-month put option with a premium of Rs. 5 and an exercise price of Rs. 450.

Delta Corporation’s stock is currently selling at Rs. 500. Determine profit or loss, if the price of Delta
Corporation’s :

(i) remains at Rs.500 after 3 months.

(ii) falls at Rs.350 after 3 months.

(iii) rises to Rs.600.

Assume the size option is 100 shares of Delta Corporation.

Question 6

Sensex futures are traded at a multiple of 50. Consider the following quotations of Sensex futures in the
10 trading days during February, 2009:
Day High Low Closing
4-2-09 3306.4 3290.00 3296.50
5-2-09 3298.00 3262.50 3294.40
6-2-09 3256.20 3227.00 3230.40
7-2-09 3233.00 3201.50 3212.30
10-2-09 3281.50 3256.00 3267.50
11-2-09 3283.50 3260.00 3263.80
12-2-09 3315.00 3286.30 3292.00
14-2-09 3315.00 3257.10 3309.30
17-2-09 3278.00 3249.50 3257.80
18-2-09 3118.00 3091.40 3102.60
Abhishek bought one sensex futures contract on February, 04. The average daily absolute change in the
value of contract is Rs. 10,000 and standard deviation of these changes is Rs. 2,000. The maintenance
margin is 75% of initial margin.
You are required to determine the daily balances in the margin account and payment on margin calls, if
any.

Question 7

The following data relate to Anand Ltd.'s share price:

Current price per share Rs. 1,800
6 months future's price/share Rs. 1,950

Assuming it is possible to borrow money in the market for transactions in securities at 12% per annum,
you are required:

(i) to calculate the theoretical minimum price of a 6-months forward purchase; and
(ii) to explain arbitrate opportunity.

Question 8

The share of X Ltd. is currently selling for Rs. 300. Risk-free interest rate is 0.8% per month. A three
months futures contract is selling for Rs. 312.
Develop an arbitrage strategy and show what your riskless profit will be 3-month hence assuming that X
Ltd. will not pay any dividend in the next three months.

Question 9

On 31-8-2011, the value of stock index was Rs. 2,200. The risk free rate of return has been 8% per
annum. The dividend yield on this Stock Index is as under:
Month Dividend Paid p.a.
January 3%
February 4%
March 3%
April 3%
May 4%
June 3%
July 3%
August 4%
September 3%
October 3%
November 4%
December 3%
Assuming that interest is continuously compounded daily, find out the future price of contract deliverable
on 31-12-2011. Given: e0.01583 = 1.01593
Question 10

You have the following five stocks in your portfolio:

Security No of Shares Price / Share Beta

A 10,000 50 1.2

B 5,000 20 2.0

C 8,000 25 0.7

D 1,000 100 1.0

E 500 200 1.3

i. Compute portfolio beta

ii. How much additional investment is required in Risk free investment to have beta to 0.8 ?
iii. How much additional investment is required in Security B to increase beta to 1.4 ?
iv. If the Nifty future is 2700 points and future have a contract multiplier of 50, how many future
contracts to be hedged to obtain the position as in (iii) above?

Question 11

Which position on the index future gives a speculator, a complete hedge against the following
transactions:

1. The share of Right Limited is going to rise. He has a long position on the cash market of Rs. 50
lakh on the Right limited. The beta of the Right Limited is 1.25.
2. The share of Wrong Limited is going to depreciate. He has a short position on the cash market of
Rs. 20 lakh of the Wrong Limited. The beta of the Wrong Limited is 0.90.
3. The share of Fair Limited is going to stagnant. He has a short position on the cash market of Rs.
20 lakh of the Fair Limited. The beta of the Fair Limited is 0.75.

Question 12

Ram buys 10,000 shares of X Ltd. at a price of Rs. 22 per share whose beta value is 1.5 and, sells 5,000
shares of A Ltd. at a price of Rs. 40 per share having a beta value of 2. He obtains a complete hedge by
Nifty futures at Rs. 1,000 each. He closes out his position at the closing price of the next day when the
share of X Ltd. dropped by 2%, share of A Ltd. appreciated by 3% and Nifty futures dropped by 1.5%.
What is the overall profit/loss to Ram?
Question 13

BSE 5000
Value of portfolio Rs.10,10,000
Risk free interest rate 9% p.a.
Dividend yield on Index 6% p.a.
Beta of portfolio 1.5
We assume that a future contract on the BSE index with four months maturity is used to hedge the value
of portfolio over next three months. One future contract is for delivery of 50 times the index.
Based on the above information calculate:
(i) Price of future contract.
(ii) The gain on short futures position if index turns out to be 4,500 in three months.

Question 14

A trader is having in its portfolio shares worth Rs. 85 lakhs at current price and cash Rs. 15 lakhs.
The beta of share portfolio is 1.6. After 3 months the price of shares dropped by 3.2%. Determine:
(i) Current portfolio beta
(ii) Portfolio beta after 3 months if the trader on current date goes for long position on Rs. 100 lakhs Nifty
futures.

Question 15

On April 1, 2015, an investor has a portfolio consisting of eight securities as shown below:
Security Market Price No. of Shares Value
A 29.40 400 0.59
B 318.70 800 1.32
C 660.20 150 0.87
D 5.20 300 0.35
E 281.90 400 1.16
F 275.40 750 1.24
G 514.60 300 1.05
H 170.50 900 0.76
The cost of capital for the investor is 20% p.a. continuously compounded. The investor fears a fall in the
prices of the shares in the near future. Accordingly, he approaches you for the advice to protect the
interest of his portfolio.
You can make use of the following information:
(i) The current NIFTY value is 8500.
(ii) NIFTY futures can be traded in units of 25 only.
(iii) Futures for May are currently quoted at 8700 and Futures for June are being quoted at 8850.
You are required to calculate:
(i) the beta of his portfolio.
(ii) the theoretical value of the futures contract for contracts expiring in May and June.
Given (e0.03 =1.03045, e0.04 = 1.04081, e0.05 =1.05127)
(iii) the number of NIFTY contracts that he would have to sell if he desires to hedge until June in each of
the following cases:
(A) His total portfolio
(B) 50% of his portfolio
(C) 120% of his portfolio
Question 16

The following information about copper scrap is given:

• Spot price : $10,000 per ton
• Futures price : $10,800 for a one year contract
• Interest rate : 12 %
• PV (storage costs) : $500 per year
What is the PV (convenience yield) of copper scrap?

Question 17

A company is long on 10 MT of copper @ Rs. 474 per kg (spot) and intends to remain so for the ensuing
quarter. The standard deviation of changes of its spot and future prices are 4% and 6% respectively,
having correlation coefficient of 0.75.
What is its hedge ratio? What is the amount of the copper future it should short to achieve a perfect
hedge?