Total 10 question carrying 10 mark each composition choose any 6.

3 - Theory
2 - Theory & Numerical
5 - Numerical
Please give numerical example wherever possible
Also avoid writing unrelated theory/page fillers and try to keep within 1 answer paper provided as
the paper is designed accordingly
Solution to the question asked in the internal test (20 marks)
2) A sugar manufacturing unit has planed production of 5600 Kg to be sold 5 months later at market price.
The spot price is Rs 35.
(a) How can the unit hedge itself if the 6 months futures price is 36.5 while the lot size is 500 kg.
(b) If the spot and futures price after 5 months is Rs 31 and 31.40 respectively what is the price per Kg
realized by the unit.
(c) Is the hedge perfect? How?
(a) The firm can hedge itself by selling 5600/500 = approx 11 futures contracts @ 36.5 per kg. Total value
of futures sold = 11 x 500 x 36.5 = 2,00,750
(b) Gain in futures trade after squaring off @ 31.40 = 11 x 500 x (36.5 - 31.40) = 28050.
Value of the stock in spot market = 5600 x 31 = 173600
add futures gain
= 28050
Net
= 201650
Price per unit = 201650/5600
= 36.00893
(c) Not a perfect hedge. A perfect hedge would have meant that the price per unit realized = 36.5 as
indicated by futures price but there is mismatch of both quantity (5500 instead of 5600) and time (futures
available after 6 month while goods to sold after 5 months) so a basis point difference (b2 = S2 - F2 =
40paise which is not known beforehand) during settlement also has to be taken into account.

Dear students,
The following question bank is provided to give you a glimpse into the kind of
questions asked and way of asking them. The list is by no mean exhaustive and there will be
topics not covered here but asked in exams.
Question 1
a)

What are the differences between forwards and futures?

b) Explain how Interest rate swaps work.

Question 2
Reliance stock is currently trading at Rs. 800 and its 3 month futures are available at the
following prices:
1)

815

2)

830

Find it any arbitrage opportunity exist in the above two cases. Explain the transactions involved
and show the working. Assume a rate of interest as 12%.
Question 3
Write Short notes on:
a)

Delta and Vega in Greeks of Option

b)

Intrinsic Value and Time Value in Option Premium

Question 4
A corporate has an expected requirement for funds 3 months from now and is planning to issue
commercial paper but is concerned that interest rates will rise from the current levels. To fix the
borrowing cost, the company bought FRA from a commercial bank at the following terms:
Notional Principal Rs. 10 crores
Trade Date Sep 2004 end
FRA Settlement Date Dec 2004 end
Notional Loan maturity Date 2 March 2005
The bank has offered FRA rate as 6.75% against commercial paper issuance rate as reference
rate.
a)

If on settlement date, the reference rate is 7%, calculate the net cost of borrowing for the corporate.

b)

If on settlement date, the reference rate is 6%, calculate the net cost of borrowing for the corporate.

Question 5
a) Calculate the price of Call Option using 2 step binomial model for a stock which is currently trading at
Rs.80 and the stock is expected to go up by 50% and down by 33.33%. The strike price of this option is
Rs. 65. The prevailing interest rates are 12% contd. The option has a validity of one year.
b) A fund manager has decided to change the beta of his portfolio worth Rs. 20,275,000 from 1.24 to
0.7. Advise on how he could do so using index futures. NIFTY index future is currently trading at 2675 and
it has a lot size of 200.

Question 6
An investor prepares a strategy wherein he buys a call option for SUN PHARMA stock which is
currently trading at Rs. 500. He buys a call Option with a strike price of 520 which is currently
trading at a premium of Rs. 15 and he buys a put option with a strike price of 480 which is
currently trading at Rs. 10. The lot size 400.
a)

What is this derivative strategy called

b)

Prepare a pay-off matrix for the trader showing max/min profit loss and Break even point

c)

What is the payout at following expiries: 550, 460, 505

d)

If he had bought 2 calls instead on 1, what would his new break even point/s.

Question 7

An investor holds 50,000 shares of a stock which is currently trading Rs. 30 per share. The
investor is interested in hedging this portfolio of shares using next month index futures which is
trading at 1500 and has a lot size of 200.
a)

How many index futures does the investor have to sell to hedge 50% of his portfolio

b) If on expiry day, index has its expiry at Rs. 35 what will be his net profit/loss from both positions if the
investor hedges 50% of portfolio?
c) If on expiry day, index has its expiry at Rs. 25 what will be his het profit/loss from both positions if the
investor hedges 50% of portfolio?

Question 8
Black and scholes model 363 page onwards example for both call and put

Question 9
If a three month interest rate on a commercial paper is 6% p.a. Also it is known that a 3-12
Month FRA is quoted at 8% p.a.
(a) What is the correct yield that a commercial paper should provide as per the given data.
(b) How can a firm take arbitrage profit on a notional sum of 1 crore if the yield given by 1 year
commercial paper is (1) 6.5% (2) 8%
Question 10
hedging for volume77-78 and cross hedge 74-76
Question 12
Expain what do you mean by the term Call option and Put option. Explain what is strike price
and premium and moneyness of an option (in/at/out of money). How can they be used for
speculation and hedging. Explain giving suitable example.
Question 13
perfect and imperfect hedging and speculation using futures

Jute bag & sugar pg 84-86

Question 14
Explain the concept of cast and carry arbitrage with suitable example
Question 15
(a) What do you mean by selling a covered call. Explain the payoff using a diagram
(b) What do you mean by the term short strangle. Explain with example.
Question 16
Expalin with example how FRA's can be used for speculation and hedging
Question 17
Margins(pg 34 to 37)

Question 18
Explain with example how IRF's can be used for speculation, hedging and
arbitrage. (application)
Question 19
Expalin with example how SWAP's can be used reducing the total cost of liablities of 2
companies (application)
Question 20
(a) What is basis risk. Discuss
(b) Explain convienience yield in futures with an example
(c) Greeks
(d) Inverted markets
(e) Contango
(f) types of risk
(g) Disadvantage of derivatives