CODE 01:

Question 1 (1.5 marks): What is a fundamental difference between the use of forward
contracts and options for hedging?
Question 2 (1.5 marks):
On May 8, 2013, as indicated in Table 1.2, the spot offer price of Google stock is $871.37
and the offer price of a call option with a strike price of $900 and a maturity date of
September is $32.80. A trader is considering two alternatives: buy 100 shares of the stock
and buy 100 September call options. For each alternative, what is (a) the upfront cost, (b)
the total gain if the stock price in September is $1000, and (c) the total loss if the stock price
in September is $800. Assume that the option is not exercised before September and if the
stock is purchased it is sold in September.
Question 3 (2 marks):
A stock price is currently $200. Over each of the next two 6-month periods it is expected to
go up by 10% or down by 10%. The risk-free interest rate is 8% per annum with continuous
compounding. What is the value of a 1-year American call option with a strike price of
$200?
Question 4 (2 marks):
Companies X and Y have been offered the following rates per annum on a $10 million 5
year loan:
Company X: Fixed: 5.1% - Floating: LIBOR
Company Y: Fixed 6.5% - Floating LIBOR + 0.5%
Company A requires a floating-rate loan; company B requires a fiex-rate loan. Design a
swap that will net a bank, acting as intermediary, 0.1% per annum and that will appear
equally attractive to both companies.
Question 5 (1.5 marks): Comparison of forward and futures contracts.
Question 6 (1.5 marks): What does a stop order to sell at $3 mean? When might it be used?
What does a limit order to sell at $3 mean? When might it be used?
CODE 02
Question 1 (1.5 marks): What is the role of option clearing Corporation (OCC)?
Question 2 (1.5 marks):
On May 8, 2013, as indicated in Table 1.2, the spot offer price of Google stock is $871.37
and the offer price of a call option with a strike price of $840 and a maturity date of
September is $63.90. A trader is considering two alternatives: buy 100 shares of the stock
and buy 100 September call options. For each alternative, what is (a) the upfront cost, (b)
the total gain if the stock price in September is $900, and (c) the total loss if the stock price
in September is $800. Assume that the option is not exercised before September and if the
stock is purchased it is sold in September.
Question 3 (2 marks):
A 1-year long forward contract on a non-dividend-paying stock is entered into when the
stock price is $30 and the risk-free rate of interest is 10% per annum with continuous
compounding.
(a) What are the forward price and the initial value of the forward contract?
(b) Six months later, the price of the stock is $35 and the risk-free interest rate is still 10%.
What are the forward price and the value of the forward contract?
Question 4 (2 marks):
Companies X and Y have been offered the following rates per annum on a $10 million 10
year investment:
Company X: Fixed: 6% - Floating: LIBOR
Company Y: Fixed: 6.6% - Flaoting: LIBOR
Company X requires a fixed-rate investment; compnay Y requires a floating-rate
investment. Design a swap that will net a bank, acting as intermediary, 0.1% per annum and
will appear equally attractive to X and Y.
Question 5 (1.5 marks): Explain how margin accounts protect investors against the
possibility of default.
Question 6 (1.5 marks): Explain what a stop–limit order to sell at 30.30 with a limit of 30.10
means.