AMITY UNIVERSITY, LUCKNOW

FINANCIAL ENGINEERING
MBA (G) IV Semester
Assignment in lieu of Mid Semester Examination
Submission date 12/03/09
Attempt all questions

Q1. An investor believes that there will be a big jump in a stock price, but is
uncertain as to the direction. Identify six different strategies the investor can
follow and explain the differences among them.

Q2. Assume an investor holds a portfolio worth Rs.1175000 that almost

tracks the nifty index. Currently the nifty futures are quoting at Rs.1950 and
the investor intends to stay away from the market due to the ensuing general
elections since he expects the market may decline by around 5%. He can
avoid exposure during this tumultuous period by selling the portfolio and re-
enter the market after the elections. By incurring so, he would incur
significant transactions cost both on sale and repurchase of the portfolio.
Show how the stock index futures contract helps him in keeping away from
this market with minimum transaction cost.

Q3. Company A and B face the following interest rates (adjusted for the
different impact of taxes):
A B
US Dollars (Floating Rate) LIBOR+0.5% LIBOR+0.1%
Canadian Dollars (Fixed Rate) 5% 6.5%

Assume that A wants to borrow US dollars at a floating rate of interest and

B wants to borrow Canadian dollars at a fixed rate of interest. A financial
institution is planning to arrange a swap and requires net 50 basis point
spread. If the swap is equally attractive to A and B, what rates of interest
will A and B end up paying?