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End Sem Derivatives 2021

The document provides instructions for submitting an answer sheet for an end semester examination for courses including Financial Derivatives. It lists the course code, name, and maximum marks. The exam consists of two sections - Section A contains 5 multiple choice questions worth 6 marks each for a total of 30 marks. Section B contains 4 long answer questions worth 10 marks each for a total of 40 marks. The document provides sample questions that may be asked, including questions about option trading strategies, implied volatility, and using derivatives for hedging. It also provides some numerical calculations that could be used to solve problems involving the Black-Scholes model.

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88 views

End Sem Derivatives 2021

The document provides instructions for submitting an answer sheet for an end semester examination for courses including Financial Derivatives. It lists the course code, name, and maximum marks. The exam consists of two sections - Section A contains 5 multiple choice questions worth 6 marks each for a total of 30 marks. Section B contains 4 long answer questions worth 10 marks each for a total of 40 marks. The document provides sample questions that may be asked, including questions about option trading strategies, implied volatility, and using derivatives for hedging. It also provides some numerical calculations that could be used to solve problems involving the Black-Scholes model.

Uploaded by

vinay
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Please send your answer sheet on:

[email protected] and cc to [email protected]


[email protected]

Gautam Buddha University


End Semester Examinations (Even Semester 2020-21)
Programme Name: MBA, BBA+MBA, B.Tech. +MBA Semester-IV/ VIII/X
Course Name: MB 522 Maximum Marks – 70
Course Code: Financial Derivatives Total Time: Two Hour

Section A (5x6= 30 Marks)


1. Answer/comment any six from the following:
a) Explain carefully the difference between hedging, speculation, and arbitrage with suitable
examples.
b) Does an arbitrage opportunity exist if the futures price is less than the spot price? Explain
your answer.
c) Under Binomial model the percentages of up and down changes can vary from period to
period.
d) Explain the factors which majorly affect the price of options. Explain with suitable examples.
e) What is the difference between 'continuous compounding' & 'regular compounding' of
interest?
f) What is meant by a protective put? What position in call options is equivalent to a protective
put?
g) In what conditions an investor should use long call strategy and short call strategy, explain
with supportive example.
h) What is the current financial derivatives market situation in India in comparison to developed
markets?
i) Explain upper & lower bound of a European put option and American call option with and
without dividend.
j) “Risk-neutral valuation signifies that the investor has considered all the possible risk in the
investment” comment on the statement.

Section B (10x4 = 40 Marks)


Answer any four questions from this section:
2. Differentiate between the following option trading strategies with payoff charts:
(a) Synthetic Long Call and Covered Call
(b) Long Combo and Protective Call
(c) Short Straddle and Short Strangle

3. Do you agree or disagree with the following statements? Justify your answer.
(a) Implied volatility is equal to historical volatility most of the times.
(b) Buying a put option strategy is not a bullish strategy?
(c) Call Option price as per Binomial Model and Black-Scholes Model is same.
(d) Derivatives are used for hedging.
4. Suppose Nifty is at 5350 on 12th April. An investor, Mr. Vivek enters a long straddle by buying
a May Rs.5400 Nifty Put for Rs.90 and a May Rs.5400 Nifty Call for Rs.110. The net debit taken
to enter the trade is Rs.200, which is also his maximum possible loss. Explain in what conditions
of the market Mr. Vivek has been taken this action. Calculate the Upper Break-even point,
Lower Break-even point and give the table & diagram of payoff schedule if the Nifty expires at
ranging from 4500 to Rs.6500.

5. Mr. Gaurav is bullish about ABC Ltd stock. He buys ABC Ltd. at current market price of Rs.400
on 4th July. To protect against fall in the price of ABC Ltd. (his risk), he buys an ABC Ltd. Put
option with a strike price Rs.390 (OTM) at a premium of Rs.15 expiring on 31st July. Do you
think Gaurav has taken right decision? What will be the risk and reward for this act? Calculate
the Break-even point and give the table of payoff schedule if the ABC Ltd stock expires at
ranging from Rs.330 to Rs.480.

6. ABC Ltd. is presently (April 2014) priced at Rs.381. The company’s futures are priced as: April,
Rs.385; May, Rs.389 and June, Rs.400. Can an arbitrageur do anything to get gains on the spread
if risk free rate of interest is 7%? Also analyse the gains at 10% and 15% risk free rate of
interest.

7. You are given with the following data on a certain share and a call option on the stock:
Share price Rs 75
Exercise price Rs 72
Time to expiration 3 months
Risk-free rate of return 8% per annum
(Continuously compounded)
Variance of stock’s return 0.36
(a) Calculate the value of the option using the Black and Scholes model.
(b) If this option is priced at Rs 7.50, what investment strategy would you suggest?

You may use the following values:


(c) e0.04*.5 = 1.020201, e0.05*.25 = 1.012578, e0.06*.5 = 1.030454, e0.07*.5= 1.035619, e-0.08*.25 =
0.980199, e0.10*.0833 = 1.008365, e-(0.12*.25) = 0.9704, e0.085*.5 = 1.043416, e-.05*.5 = 0.9753,
e(.12)*1 = .8869)
(d)
(e) N(1.25) = .8944, N(1.15) = .8749, N(-.1851) = .4266, N(+.1851) = .9862), N(0.35) = .6368,
N(0.05) = .5199

*****

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