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# Financial Derivatives-1

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Assignment A

Q1 Briefly describe the main factors affecting the price of an option.

Q2 Explain swap contracts.

Q3 Explain the concepts of delta, Gama and Vega.

Q4. Write short notes on
(a) LBO or (b) Corporate restructuring

Q5. An investor buys 4 lots of MICROSOFT futures at Rs.545 each and sells it at Rs.447 each. If one contract is 764 shares what is the profit/loss in the transaction?

Assignment B

Q1. An investor sells 3 lots of Nifty futures at Rs.5231each. On that day Nifty closes at Rs.5310 in the futures market. What is the mark to market for the investor if any? (One lot of Nifty is 50 shares)

Q2. Explain ‘Straddle’ and ‘ Strangle’ option strategy.

Q3 . ‘Option value is influenced by the option prices, which in turn depend on a number of factors” What are assumptions made by Black and Scholes option Pricing model? Also discuss how does option premium depends on time to expiration, Interest rates, Spot prices and strike prices.

CASE STUDY

On 3rd August , NIIT is trading at Rs.200 and 200 strike call option for one month is trading at Rs.7.50. An investor who is bearish on NIIT sells the call option. NIIT on that month’s expiry closes at Rs. 207.5. What is the investor’s profit/loss in the trade?(1 lot of NIIT is 1625 shares)

Assignment C

Q:1 An investor bought a put option on a stock with a strike price Rs. 2000 for Rs. 200. The option will be in the money when _______.

(a) The stock price is less than Rs. 2000

(b) The stock price is greater than Rs. 2200

(c) The stock price is greater than Rs. 2000

(d) The stock price is less than Rs. 1800

Q:2 All Stock Options are American in nature.

(a) TRUE

(b) FALSE

Q:3 On 3rd August, NTPC is trading at Rs. 200 and 200 strike call option for one month is trading at Rs. 7.50. An investor who is bearish on NTPC sells the call option. NTPC on that month’s expiry closes at Rs. 207.5. What is the investor’s Profit / Loss in the trade? 1 lot of NTPC is 1625 shares.

(a) Rs. -12187

(b) Rs. 10000

(c) Rs. 12187

(d) No Profit no Loss

Q:4 In futures trading initial margin is paid by:

(b) clearing member

(c) seller only

Q:5 An investor has Unitech shares in her portfolio. RBI is increasing interest rates which is negative for the stock. She wants to protect the downside in the stock as she feels RBI will decide on increasing interest rates in the next 3 months. What should she do?

(a) Buy 3 month call option of Unitech

(b) Buy 2 month put option of Unitech

(c) Buy 1 month put option of Unitech

(d) Buy 3 month put option of Unitech

Q:6 Nifty futures is trading at Rs. 3325 and an investor buys a 3400 call for current month for Rs. 100. What should be the closing price of Nifty only above which the investor starts to make Profits if he holds his long option position? 1 lot of Nifty = 50 shares.

(a) 3425

(b) 3400

(c) 3325

(d) 3500

Q:7 Which of the following is an exchange traded contract?

(a) Futures on Nifty

(b) Forward contract on oil

(c) An interest rate swap

(d) A 10 year loan

Q:8 As more and more ____ trades take place, the difference between spot and futures prices would narrow.

(a) hedge

(b) delta

(c) arbitrage

(d) speculative

Q:9 Nifty is at 5200. A put option at 5000 strike price is trading at Rs . 150. What is the

intrinsic value of the option?

(a) 200

(b) 0

(c) 350

(d) 150

Q:10 Nifty is currently at 5100. An investor feels Nifty will not go beyond 4500 in next three months. He sells two lots of 5100 strike call on Nifty for Rs. 200 a lot. Because of good industrial production data, Nifty rallies to 5200 on the option’s expiry day. What is the Profit/Loss to the investor? (1 lot = 50 shares)

(a) Rs. 10000

(b) Rs. -10000

(c) Rs. 20000

(d) Rs. -20000

Q:11 On 1st November, SBI is trading at Rs. 2300. An investor is bearish on the company because of the earnings of last quarter and sells a SBI futures at Rs. 2325. He buys back SBI futures at Rs. 2300. What is the Profit / Loss for the investor if 1 lot of SBI is 250 shares?

(a) Rs. 6250

(b) Rs. 0

(c) Rs. -6250

(d) Rs. -10000

Q:12 Which of the following is NOT a hedge for a long position in an underlying stock?

(a) Sell call option

(b) Sell futures

(c) Sell put option

Q:13 When the strike price is lower than the spot price of the underlying, a call option will be

____.

(a) At the money

(b) In the money

(c) Out of the money

(d) American Type

Q:14 On 1st January, SBI is trading at Rs. 2310. An investor is bullish on the company because of the earnings of last quarter and buys a SBI futures at Rs. 2310. He sells SBI futures at Rs. 2335. What is the Profit / Loss for the investor if 1 lot of SBI is 250 shares? (a) Rs. -10000

(b) Rs. -6250

(c) Rs. 6250

(d) Rs. 0

Q:15 An investor buys TCS for Rs. 575 in the futures market. At the end of the day TCS futures closes at Rs. 500 in the futures market. What is the mark to market the investor is making/losing ? (1 lot of TCS = 1000 shares)

(a) Rs. 500000

(b) Rs. 575000

(c) Rs. -75000

(d) Rs. 75000

Q:16 An investor buys a 4 lots of Nifty at Rs. 5100 each. He sells 2 lots at Rs. 5050 and carries 2 lots for next day. On that day Nifty futures closes at Rs. 5000. What is his total Loss including mark to market Loss? One lot of Nifty is 50 shares .

(a) Loss of Rs. 5000

(b) Profit of Rs. 5000

(c) Profit of Rs. 2000

(d) No Loss, no Profit

Q:17 Infosys is trading at Rs. 1500 in the cash market. What should be the fair price of Infosys futures expiring 90 days from today. Risk free rate is 8% p.a.

(a) 1550

(b) 1515

(c) 1530

(d) 1540

Q:18 An investor buys a 1 lot of Nifty futures at Rs. 4927 and sells it at Rs. 4567 If one

contract is 50 shares what is the Profit/ Loss in the transaction?

(a) Loss Rs. 22000

(b) Profit Rs. 22000

(c) Loss Rs. 18000

(d) Profit Rs. 18000

Q:19 Which of the following positions has a limited downside ____ .

(a) Sell futures

(c) Sell stock

(d) Sell Call option

Q:20 Reliance is trading at Rs. 1520 in the cash market. What should be the fair price of

Reliance futures expiring 90 days from today. Risk free rate is 8% p.a.

(a) 1529

(b) 1537

(c) 1551

(d) 1563

Q:21 Like Futures contracts there is daily settlement of options contracts.

(a) TRUE

(b) depends on the expiry

(c) FALSE

(d) depends if the option is call or put

Q:22 TCS is trading at Rs. 420 in the spot market and Rs. 435 in the futures market. Is there an arbitrage opportunity? The Futures contract is settling today.

(a) No

(b) Depends on Market Sentiment

(c) Yes

Q:23 Reliance Capital is trading at Rs. 1000 in cash market. What should be the price of

Reliance capital futures expiring 60 days from today. Risk free rate is 8% p.a.

(a) 1087

(b) 1013

(c) 1081

(d) 1121

Q:24 An investor buys 2 contracts of TCS futures for Rs. 570 each. He sells of one contract at Rs. 585. TCS futures closes the day at Rs. 550. What is the net payment the investor has to pay/ receive from his broker? ( 1 TCS contract = 1000 shares )

(a) Pay Rs. 20000 to the broker

(b) Pay Rs. 5000 to the broker

(c) Receive Rs. 5000 from the broker

(d) Receive Rs. 15000 from the broker

Q:25 The value of a put option is positively related to all of the following EXCEPT:

(a) exercise price

(b) risk-free rate

(c) time to maturity

Q:26 If a farmer expects to sell his wheat in three months time in anticipation of a harvest. He wants to hedge his risk, he needs to:

(c) sell wheat now

(d) sell wheat futures now

Q:27 DLF is trading at Rs. 380 in the spot market and Rs. 395 in the futures market. Is there an arbitrage opportunity? The Futures contract is settling today.

(a) Depends on Market Sentiment

(b) Yes

(c) No

Q:28 Security descriptor for stock Futures contract is :

(a) FUTSTK

(b) OPTIDX

(c) OPTSTK

(d) FUTIDX

Q:29 Derivatives help in ____.

(a) Risk Management

(b) Price Discovery of the underlying

(c) Improving Market Efficiency

(d) All of the above

Q:30 Nifty is at 3900. What should be the fair price of Nifty futures expiring 180 days from today. Risk free rate is 8% p.a.

(a) 4027

(b) 4083

(c) 4031

(d) 4059

Q:31 The maximum expiry for individual stock options contract is :

(a) 2 months

(b) 6 months

(c) 1 months

(d) 3 months

Q:32 The parties for the Futures contract have the flexibility of closing out the contract prior to the maturity by squaring off the transactions in the market. State true or false.

(a) TRUE

(b) FALSE

Q:33 Nifty is at 3375. What should be the fair price of Nifty futures expiring 30 days from today. Risk free rate is 8% p.a.

(a) 3367

(b) 3377

(c) 3398

(d) 3352

Q:34 Nifty futures is trading at Rs. 4955. An investor feels the market will not go beyond

5100. He can ____.

(a) Sell 5000 Nifty call

(b) Sell 5100 Nifty put

(c) Sell 5000 Nifty put

(d) Sell 5100 Nifty Call

Q:35 Arbitrage is a ____.

(a) Risk free Strategy

(b) High Risk Strategy

Q:36 If an option is out of the money and the strike price of the option is lower than the spot price of the underlying, then we are referring to ____.

(a) A Put Option

(b) An European Option

(c) A Call option

(d) An American option

Q:37 Nifty is at 5000. An investor buys a 5000 strike price put option for Rs. 170. The option is currently____.

(a) Out of the money

(b) American Type

(c) At the money

(d) In the money

Q:38 Nifty futures is trading at Rs. 3975 and an investor buys a 4000 call for current month for Rs. 100. What should be the closing price of Nifty only above which the investor starts to make Profits if he holds his long option position? 1 lot of Nifty = 50 shares.

(a) 3975

(b) 4000

(c) 4075

(d) 4100

Q:39 Price that is agreed upon at the date of the contract for the delivery of an asset at a

specific futures date is called _______.

(a) Spot Price

(b) Discount Price

(c) Cash market price

(d) Futures Price

Q:40 Price of an option expiring three months from today will be higher than price of an

option expiring in two months from today.

(a) Incomplete data

(b) Depends if it is call or put option

(c) TRUE

(d) FALSE