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P/ID 77539/PMHQ

PMB07

MAY 2013

Maximum : 100 marks

PART A (5 6 = 30 marks)
All questions carry equal marks.
1.

What are derivates? Why do companies hedge risk

using derivatives?

2.

Given the following :

Price of the equity
Price of the 6 month call at
Price of a 6 month call at

26
25
30

25 call and sells the

call. What is the net cash outflow?

4
2
20

3.

4.

5.

Given that the one year risk free interest rate is

8% and ABCs stock has a standard deviation of
031, find the value of a put option with 6 months
to maturity and an exercise price of
70. ABCs
stock is currently trading for 6830 per share.

6.

Explain what a stop limit order to sell at 20.30

with a limit of 20.10 means.

7.

A stock index currently standing at 35. The risk

free interest rate is 8% p.a. (with continuous
compounding) and the dividend yield on the index
is 4% p.a. What should be the futures price for a
four month contract?

8.

A stock sells for

30. What is the value of a one
year call option according to the Black scholes
model to buy the stock at
25, if debt currently
yields 10%? (Assume d1 and d2 = 1).
PART B (5 10 = 50 marks)
All questions carry equal marks.

9.

Explain the growth and

derivatives market in India.

development

of

10.

Distinguish between call option and put option.

How values of call option are determined.

11.

Consider the following data :

S =100, u = 1.5, d = 0.8, E = 105, r = 0.12, R = 1.12.
What is the value of the call option?

12.

P/ID 77539/PMHQ
PMB07

13.

The stock index is currently at 1400 and the six

month stock index future is trading at 1500. The
risk-free annual rate is 11 %. What is the average
annual dividend yield on the stocks in the index?

14.

The shares of ABC Co stand at

with a strike price of

14.

(a) What is the intrinsic value of the options?

(b) What is the time value of the options?
What
might cause the time value to double
with no change in intrinsic value?
15.

Kotak has a market price of

890. The volatility
on the share is 0.32; the risk-free interest rate is
5%. What would be the price of the call with a
strike price of
880, if the expiry date is 20 days
ahead? Assume there has not been any dividend
announcement.

16.

A Cos equity is currently selling for

share. In a year from now it can rise to

100 per
150 or

fall to
90. The interest rate is 15%. What is the
value of a call option on A Cos equity as per the
Binomial model if the exercise price is
3

100?

P/ID 77539/PMHQ
PMB07

PART C (1 20 = 20 marks)
(Compulsory)
Case Study
17.

Price changes of two software stocks, A and B, are

positively correlated. The historical relationship
has been as follows :
Percentage change in A = 0.02 + 0.80 (Percentage
change in B).
2 million of A, how
(a) If an investor owns
much of B should he short sell to minimise his
risk?
(b) What is his hedge ratio?

P/ID 77539/PMHQ
PMB07