Section A ( any 5)* 6  

           Total marks =30

All  theory

Section B (any 3)* 10              Total Marks=30

Question 1 (A) Sum   ------ 5

                 (B) Theory ------5

Question 2 (A) Sum   ------ 5

                 (B) Theory ------5

Question 3 (A) Sum   ------ 5

                 (B) Theory ------5

Question 4 (A) Sum   ------ 5

                 (B) Theory ------5

Section C -- Compulsory 15 marks

Part A Sum
Part B  Theory

FUTURES

1. ABC is quoted in market at Rs 40. The 6 months futures contract on 100 shares of ABC ltd
can be bought. The risk-free rate of return is 12% per annum continuously compounded.
ABC ltd is certain to pay a dividend of Rs 2.5 per share 3 months from now.
a. What should be the value of future contract?
b. If the future contract is priced at Rs 4100, what action would you follow? If it is
priced at 3800, what would you do?

2. Calculate the price of 6 months futures contract on a share that is currently priced at Rs75.
The share is expected to pay Rs 2 as dividend 4 months from today. The continuously
compounded risk free rate of return is 12 % per annum. The contract size is 100. If the
contract value is Rs 7400, what action would you follow? In case it is 7800, what action
would you follow?

3. The stock of Y ltd, a non- dividend paying stock is today selling at Rs 72. You wish to enter
into a futures contract on this stock maturing in 6-months time
a. If risk-free rate of return is 12% per annum continuously compounded, what would be
the futures price?
b. If price of futures contract is Rs 75, what action would you take? In case price is at
Rs77, will your decision change?
4. Consider a 3 month futures on X ltd, quoting at Rs 1100. Continuously compounded rate of
return is 12 % per annum and continuously compounded yield on share is 4% per annum.
a. Calculate the value of futures price.
b. What action would you follow if futures are available at Rs 1110? Will your position
change, if futures are available at 1150?

INDEX

5. The 3-months futures contract on Nifty is available at a time when Nifty is quoting at 1800
points. The continuously compounded rate of return is 10%. Yield is 2 %. One futures
contract is equal to 200 Nifty. How much will you pay for the Nifty futures? If the Nifty
forward trades at Rs 1825, what action would you follow?

6. Nifty spot is 1300 points. You want to take a position in 3 month Nifty futures. The risk free
rate of return is 8 % and the yield is 2 %. What would be the theoretical value of Nifty
futures? Suppose the actual value offered is 1325, what action would you follow? Assume a
multiple of 100.

COMMODITIES

7. Consider a 6 months gold future contract of 100 gram. The spot price is 600 per gram and it
cost Rs 3 per gram for the 6 monthly period to store gold and the cost is incurred at the end
of 2 months. If the risk-free rate of return is 12%, continuously compounded, compute the
futures price.
If the futures were available at Rs 620, what action would you follow? Would the position
change, if the future were available at 660?

8. The spot price of steel scrap is Rs 5000 per tonne. The 1-year future price is 5802. The risk-
free rate of return is 15%. Present value of storage cost is Rs 250 per annum. Compute the
convenience yield, assuming that the futures are fairly priced.

9. L packaging ltd trades in paper books and manufacture carton boxes. The following
information is available as futures market in paper works.

Particulars Single layer paper books Double layer paper books

CMP 500 per kg 720 per kg
 Carrying 150 200
cost(Rs/Quintal/quarter)payable
at the end of each quarter
Cash rebate for high volume 10 per kg 15 per kg
purchase(given by the selling
company, receivable after
4months)
6 months futures contract rate(1 520000 740000
tonne)

Risk free rate of return is 9 % per annum. Suggest the course of action undertaken by you, if
you are an investment analyst of the firm.

OPTIONS

10. The Infosys stock is selling at Rs 5000. Mr. X is on negative view about the stock. He
decides to go through the option route to take advantage of the situation. He buys an option
from Mr. A, which will entitle him to sell 100 shares on or before Dec 30 at Rs 4500 per
share, for which she has to pay Rs 200 per share today. Identify type of option, exercise
price, expiry date, option premium, buyer of option, writer of option, underlying asset,
current market price.

11. A 4 month European call option on a dividend paying stock is currently selling at Rs 5. The
stock price is Rs 64. The strike price is Rs 60 and a dividend of 80 paise is expected in a
month. Risk free rate of return is 12% per annum on all maturities. Do you have an arbitrage
opportunity?

12. You bought a one month call option at a premium of Rs 6(sunk cost), with an exercise price
of Rs 40. What is the position if the current market price is
a. Rs 45
b. Rs 40
c. Rs 35
Will the position change if you had been a put buyer? What is the corresponding position for
the call seller and the put seller?

13. X has entered into 5 put options and 5 call options in different securities.

Call option

Securities Exercise price Actual price

 P 369 376
Q 450 444
R 1790 1700
S 136 140
T 953 953

Put option

Security Exercise price Actual market price

A 120 122
B 758 758
C 350 340
D 65 69
E 225 220

What is his position on the date of exercise and what he will do?

14. X shares are presently quoted at Rs 100. 3 months call option carries a premium of Rs 15 for
a strike price of Rs 120 and 3 months put option carries a premium of Rs 20 for the strike
price of Rs 120. If the spot price is in the range of 90 to 160 with intervals of Rs 5, prepare
net pay off graph for both call and put option from both the buyer and option writer
perspective.

15. The strike price of a share is Rs 180. Current market price is Rs 200 per share. The risk free
rate of interest is 10%.
a. Calculate the theoretical minimum price of a European call option expiring after 1
year.
b. If the price of the call option is Rs 30, show the profit made by the arbitrager.
16. Given strike price is Rs 400, CMP is Rs 370, and risk-free rate of return is 5 %. Calculate
theoretical minimum price of European put option after 6 months.
If European put option is priced at Rs 10, what will be your action?

BONDS

17. 10% Govt. of India bonds( annual interest payments) have 5 years to maturity and a maturity
value of Rs 10000. Ascertain the value of the bond today, if the desired yield on such bonds
are 8%, 10% and 12%. Assuming the desired yield is 8% and presently the bond is traded at
Rs 11500, what would you do?

18. X has issued a tax saving bond carrying an interest of 8% on future value of Rs 10000 per
bond with 4 years to maturity and interest payable each year. VV finance has also issued tax
 saving bond of Rs 10000 each with 6 years to maturity carrying a coupon rate of 6%. Today,
i.e. 2 years after the issue date, when a new bond with a 4 year to maturity, carrying a coupon
rate of 7% and bonds with 6 years to maturity carries 5 % and both these bonds are priced
correctly. Which is cheaper to buy now and how many bonds can be bought for 5 lakh.
Assume that the parts of the bond can also be bought.

19. X ltd has issued Rs 1 lakh zero coupon bond, that has 5 years remaining to maturity of 11 %.
What is the current value? If the bond is traded at 74700, what should an investor do?

20. A is willing to purchase a 5 year Rs 1000 par value bond, having a coupon rate of 9%. A’s
required rate of return is 10%. How much A should pay to purchase the bond, if it matures at
par?

21. A is prospecting to sell an 8 years bond of Rs 1000 at 10% coupon rate per annum. The bond
amount will be amortized equally over its life. If an investor has a minimum required rate of
return of 8%, what is the bond’s present value?

MERGERS AND ACQUISITIONS

22. Company X plans to acquire company. You are required to show merger gains using the
following data

Particulars X Y
Pre-merger market price per 60 30
share
No of shares outstanding in 14 lakh 7 lakh
the market
The merger gain is expected to be 150 lakhs. X ltd has offered 1 share to every 2 shares of Y.
distribute the merger gains between X and Y.

23. Company X and company Y are in the same business line and the annual cash flows are
expected to be 36 lakhs and 18 lakhs respectively. If the two firms decide to merge, they
have a post tax saver of 6 lakhs every year. X ltd proposes to absorb Y ltd by paying a cash
consideration of 150 lakhs. The cost of capital is 15 %. How will you allocate the merger
gains between the share holders?

24. M company ltd is acquiring N company ltd by the way of merger. The following data are
available with respect to the company

Particulars M N
 Earnings after tax 80 lakhs 24 lakhs
No of equity shares 16 lakhs Lakhs
outstanding
Market value per share 200 160

N company ltd wants to be sure that the earnings available to its shareholders will not be
diminished by the merger. What should be the exchange ratio in that case?