PRACTICE QUESTIONS [FINANCIAL DERIVATIVES]

CHAPTER 4: SWAPS
1. Companies A and B have been offered the following rates per annum on a $20million
five-year loan:
Fixed rate Floating rate
Company A 12% Libor+0.1%
Company B 13.5% Libor+0.6%
Company A requires a floating-rate loan; company B requires a fixed-rate loan. Design a
swap that will net a bank, acting as intermediary, 0.1% per annum and will appear equally
attractive to both companies.
2. Companies A and B have been offered the following rates per annum on a $20million
five-year loan:
Fixed rate Floating rate
Company A 12% Libor+0.1%
Company B 13.5% Libor+0.6%
Company A requires a floating-rate loan; company B requires a fixed-rate loan. Setting up a
swap without financial intermediary and the gain from swap is equally shared among two
parties
3. A $300 million interest rate swap has a remaining life of 21 months. Under the term of
the swap, 1-year Libor is exchanged for 7% per annum (compounded annually). The term
structure of interest rates is currently flat at 5% per annum with continuous compounding.
The 1-year Libor rate at last settlement date was 4.6% per annum (compounded annually).
What is the current value of the swap to the buyer and the seller?

1
 PRACTICE QUESTIONS [FINANCIAL DERIVATIVES]

4. Company X wishes to borrow USD loan at a fixed rate of interest. Company Y wishes to
borrow Japanese yen loan at a fixed rate of interest. The amounts required by two
companies are roughly the same at the current exchange rate. The companies have been
quoted the following interest rates, which have been adjusted for the impact of taxes:
JPY USD
Company X 5.0% 9.6%
Company Y 6.5% 10.0%
Design a swap that will net a bank, acting as intermediary, 50 basis points per annum and
will appear equally attractive to both companies and ensure that all foreign exchange risk
is assumed by the bank
5. A currency swap has a remaining life of 15 months. It involves exchanging interest rate
(semi-annual compounding) at 10% on 20 million GBP for interest at 6% on 30 million
USD. The payments are made every 6 months. The term structure of interest rates in both
the UK and US is currently flat, at 4% in USD and 7% in GBP with continuous compounding.
The current exchange rate (USD per GBP) is 1.85. What is the current value of the swap to
the party paying USD? What is the value of the swap to the party paying GBP?

2
 PRACTICE QUESTIONS [FINANCIAL DERIVATIVES]

CHAPTER 5: OPTIONS
1. You purchase an underlying asset priced at $77 and write a call option on it with an
exercise price of $80. The call costs $6.
a. Determine: payoff; maximum gain; maximum loss; breakeven price
b. Draw the payoff graph of this strategy
2. You purchase an underlying asset priced at $57 and long a put option on it with an
exercise price of $55 and selling at $3.
a. Determine: payoff; maximum gain; maximum loss; breakeven price
b. Draw the payoff graph of this strategy
3. The price of stock is $28 and the price of a three-month European call option on the
stock with a strike price of $27 is $1.3. The risk-free rate is 4% pa.
a. what is the intrinsic value and time value of this call option
b. what is the price of a three-month European put option with a strike price of $27
c. what is the intrinsic value and time value of this put option
4. What is the lower bound and upper bound for
a. the price of a four-month call option on a stock when the stock price is $28, the strike
price is $25 and the risk-free rate is 8%
b. the price of a one-month put option on a stock when the stock price is $12, the strike
price is $15 and the risk-free rate is 6%
5. A stock price is currently $47. It is known that at the end of six months it will be either
$45 or $55. The risk-free interest rate is 10%.
a. What is the value of a six-month European call option with a strike price of $50
a. What is the value of a six-month European put option with a strike price of $50
6. A stock price is $57. Over the next three-month, it is expected to go up by 10% or down
by 10%. The risk free interest rate is 8%.
a. What is the value of a three-month European call option with a strike price of $45
b. What is the value of a three-month European put option with a strike price of $45