Roll No______________________

DEPARTMENT OF MANAGEMENT STUDIES

INDIAN INSTITUTE OF TECHNOLOGY ROORKEE
MID TERM EXAMINATION SPRING 2018-19
FINANCIAL ENGINEERING & RISK MANAGEMENT BMN 612
PLEASE READ & FOLLOW THE INSTRUCTIONS CAREFULLY
INSTRUCTIONS
NOTE CAREFULLY THE UNITS IN WHICH THE CHOICES ARE GIVEN AND ASKED
AS FAR AS PRACTICABLE, DO ALL CALCULATIONS TO FOUR PLACES OF DECIMALS
THIS QUESTION PAPER CONSISTS OF TWELVE MCQs OF 2.50 MARKS EACH
ALL QUESTIONS ARE COMPULSORY
ANSWERS ARE TO BE MARKED IN THE SEPARATE MCQ ANSWER SHEET
PROVIDED FOR THIS PURPOSE
EXAMINEES MAY RETAIN THIS QUESTION PAPER FOR FUTURE REFERENCE
EXAMINEES SHALL NOT CARRY THIS QUESTION PAPER OUTSIDE THE EXAM HALL
BEFORE SUBMITTING THE ANSWER SHEET TO THE INVIGILATOR UNDER ANY
CIRCUMSTANCES
ASSUMPTIONS ABOUT VARIOUS INPUT PARAMETRIC VALUES MAY BE MADE
ONLY IN THE CLEAR EVENT OF INSUFFICIENCY OF DATA FOR THEIR
COMPUTATIONS, IF THESE VALUES CAN BE CALCULATED FROM THE AVAILABLE
DATA, NO CREDIT WILL BE GIVEN FOR THE QUESTION SOLVED ON THE BASIS OF
ASSUMED DATA VALUES.
QUESTIONS

1 Today is January 1, 2019. XYZ Ltd has just acquired a 12 month T-bill with
a remaining maturity of 8 months at a discount yield of 9% p.a.. The yield
is based on money market conventions with a uniform 30 day month and
12 month year. The effective annual yield on ACT/365 basis (in %) is
closest to:

(A) 9.20 (B) 9.27 (C) 9.44 (D) 9.34 (E) 9.55 (F) 9.18
(G) 9.48 (H) 9.17 (I) 9.50 (J) 9.74

2 Today is t=0. The cheapest-to-deliver bond in a Treasury bond futures

contract maturing for delivery at t=162 days is a 16% coupon bond with
semi-annual interest payments. Last coupon payment was made 126 days
 ago and the next is due at t=55 and the next following at t=239 days. The
term structure is flat, and the interest rate with continuous compounding
is 10% p.a. The conversion factor for the bond is 1.8. The current quoted
bond price is $120. The quoted futures price is closest to:

(A) $66.21 (B) $64.01 (C) $63.84 (D) $69.36 (E) $66.85 (F) $65.77
(G) $67.58 (H) $64.34 (I) $62.69. (J) $71.90

3 A portfolio manager has a portfolio of long positions in stocks valued at

INR 18.00 million with a beta of 1.75 at t=0 when the BSE S&P Sensex is
36,000. He desires to hedge this portfolio for a period of 3 months using
BSE S&P Sensex futures with a maturity of four months. The index has a
continuously compounded yield of 3% and the risk-free rate is 9%
continuously compounded. The contract multiple is INR 15. Using no
arbitrage considerations wherever required, the “integral” number of
contracts (after rounding off) required for establishing the optimal hedge
is:

(A) 58 (B) 54 (C) 59 (D) 62 (E) 57 (F) 60

(G) 31 (H) 56 (I) 63 (J) None of these

4 In continuation of Q No 3, the portfolio manger takes the appropriate

position in appropriate number of contracts for optimal futures hedge. If
the index actually falls by 8% at t=3 months from its original value, the net
return for three months (not annualized) achieved on the hedged
portfolio over this three month period (in %) is closest to:

(A) 1.97 (B) 1.89 (C) 2.33 (D) 2.25 (E) 1.92 (F) 1.82
(G) 2.07 (H) 2.59 (I) 2.23 (J) 2.12

5 A bank XYZ has a portfolio of T bonds worth Rs. 100 million at t=0. At t=0,
the spot price of T-bonds was Rs 98.0575 per Rs 100 of face value and T-
bond futures maturing at t=4 months were trading at Rs 93.7925. The
bank took an appropriate hedging position with 1,000 contracts (Each
contract covers Rs 0.1 million of bonds). It liquidated the position at t=1.5
months when the spot price of the T-bonds was 97.25 and the futures
 were trading at 93.15. The profit/loss on the hedged portfolio (in million
Rs) was:

(A) (-) 1.615 (B) (+) 1.285 (C) (-) 0.330 (D) (+) 0.225
(E) (-) 0.690 (F) (-) 0.165 (G) (+) 0.975 (H) (+) 0.150
(I) (+) 0.750 (J) None of these

6 The following quotes are available on October 5, 2018:

Traded Prices: December 18 Futures (Rs.): 93.36 – 93.38 (Bid-Ask)
March 19 Futures (Rs.): 91.95 – 92.02 -do-
You formulate and implement a spread strategy as follows:
Short 1000 March 19 futures
Long 1000 December 18 futures
Each contract covers Rs 1,00,000 face value of bonds.
You close out your positions on October 15, 2018 when the quotes were:
December 18 Futures (Rs.): 93.0050 – 93.0250 (Bid-Ask)
March 19 Futures (Rs.) : 91.3000 – 91.3700 -do-
A long position on futures must be entered at the at the "ask" price and
closed out at “bid” price conversely.
The profit/loss from the strategy (Rs in thousands) was:

(A) -220 (B) +255 (C) +205 (D) -225 (E) +210 (F) -300
(G) -255 (H) +225 (I) -275 (J) None of these

7 P goes short 5 T-bill futures of nominal value USD 1 million each today
(t=0). The futures mature for delivery at t=6 months. P closes out his
position at t=2 months. The IMM index quotes at t=0 and t=2 months are
89.2 and 92.0 respectively. The profit/loss achieved on the futures
position (USD, P=Profit, L=Loss) is:

(A) 27000 (P) (B) 27500(P) (C) 28000 (L) (D) 32000 (P)
(E) 31250 (L)(F) 31000 (P) (G) 30500 (L) (H) 35000 (L)
(I) 28750 (L) (J) None of these

8 PQR Ltd has a portfolio of long stocks valued at INR 2.00 million with a
beta of 1.75. Today, the futures on S & P BSE Sensex are trading at 36,000
and the lot size is 15. PQR has taken a long position in 8 such S&P Sensex
 futures contracts. The beta of the portfolio after inclusion of these
derivative positions is works out to:

(A) 3.50 (B) 3.74 (C) 3.35 (D) 3.91 (E) 4.10 (F)3.65

(G) 4.35 (H) 4.20 (I) 3.05 (J) None of these

9 Suppose in January, a fixed income portfolio manager believes that he

may be required to liquidate the fund’s long term holdings of his company
in mid-May. Also suppose that the bond portfolio has an aggregate face
value of Rs 100 million, average coupon rate of 12.5%, average maturity
of 15 years and currently valued at Rs 103 million. The estimated YTM of
the bond portfolio is 12.05% and its duration is 7.56 years. The bond
futures that trade have 6% 10 year bond as the underlying. The manager
is considering hedging the portfolio against interest rate risk by going
short in June bond futures contracts that currently are trading at 67.6177
per 100 of face value with a duration of 7.25 years and YTM of 11.65%.
Each future has 1000 underlying bonds, each of face value 100. Assuming
that the manager shorts 1200 contracts, the duration (in years) of the
hedged portfolio is closest to (Assume yield shifts to be parallel):

(A) 1.20 (B) 1.35 (C) 1.99 (D) 1.54 (E) 2.50 (F) 3.10
(G) 1.85 (H) 2.15 (I) 2.05 (J) 2.40

10 X has taken a long position in 3 month T-Bill futures maturing for delivery
after 6 months from now at an IMM quote of 90.20. The interest rate that
he has locked in for borrowings for the period between t=6 months and
t=9 months from today (in %) is closest to (Use money market
conventions with 12 months of 30 days each in one year):

(A) 10.04 (B) 9.84 (C) 9.65 (D) 10.33 (E) 11.02 (F) 10.74
(G)10.15 (H) 11.20 (I)10.20 (J) 9.76

11 A US based arbitrageur (Home Currency USD) goes long 6 GBP futures

envisaging delivery in 3 months, each of contract size GBP 87,500 @ USD
1.80 = GBP 1.00. At the same time, he shorts 6 GBP futures of the same
 contract size with maturity at 9 months from now @ USD 1.98=GBP 1.00.
The excess GBP, if any, at t=9 months will be converted to USD at the
same rate i.e. 1 GBP=1.98 USD. The interest rates on USD and GBP
lendings and borrowings are respectively 9% and 4% p.a. on simple
interest basis. The arbitrage profit/loss on the spread transaction (in
thousands USD) at t=9 months, assuming simple interest computations
and 12 months per year (P=Profit, L= Loss) is closest to:

(A) 76.20 (P) (B) 75.38 (L) (C) 76.15 (L) (D) 72.25 (P)
(E) 76.10(P) (F) 77.42 (P) (G) 57.70 (L) (H) 71.31 (P)
(I) 72.77 (P) (J) 73.82 (P)

12 Today is t=0. XYZ Ltd has an investment in T-bills of the face value of USD
25,000,000 with a maturity of 9 months from now. However, it plans to
liquidate the investment at 3 months from now. The current T-bill
discount yields are 10% p.a. (money market basis with 12, 30 day months
per year). To protect itself against interest rate rise between now and the
liquidation date, the company proposes to hedge this portfolio issue by
taking a short position in T-Bill futures contracts, presently trading at IMM
quote of 95. The face value of each such contract is USD 1,000,000.
Suppose that the T bill investment is liquidated at t=3 months @ 12% p.a.
and that the hedge is lifted at the futures quotes of 93.20. The
profit/loss (P=Profit, L=Loss) on the hedged position (in thousands USD)
calculated at t=3 months is closest to:

(A) 27.80 (L) (B) 26.35 (L) (C) 28.40 (P) (D) 28.12 (L)
(E) 28.30 (P) (F) 25.00 (L) (G) 31.50 (L) (H) 28.35 (P)
(I) 28.05 (L) (J) None of these