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Indian Education Society’s

Management College and Research Centre, Mumbai

(FINAL EXAMINATION)

Date : 01/11/2018 Day: Thursday Time: 10.30 To 01.30 pm Duration: 3 Hrs.

Program: MMS–2nd Year Sem.:III Sub: Derivatives and Risk Management Max. Marks: 60
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Instructions:
1. Question No. 1 is Compulsory and carry 20 marks
2. Attempt any FOUR from Q.No.2 to Q.No.6. Each question for 10 marks
3. Each question has a sub question (A, B, etc.) and respective marks assigned for sub questions.
4. Label the Answers properly, for example, Question 1, answer [1. A, 1. B, etc].
5. Restrict your answers to only 2 decimals.
6. The usage of stock and exchange name is for examination purpose only.
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Q.1. [20 MARKS]
Peter Dias, a proficient trader in stock market, analysis the derivative data very closely before taking
any kind of position in the future & option segment. He understands the benefit of leveraging in the
derivative segment, but is equally calculative while evaluating his risk. He is analysing some of the data
for TCS stock which he is willing to take a fresh position (long or short) based on the data below for
Table 1.2 & 1.3. He also has some of the existing positions open in the future segment given below in
Table 1.1.
Existing Open Positions: (Table 1.1)
No. of Entry Initial
Stock Position Lot Size CMP
Lots Price Margin Paid
INDUSINDBK Buy 1 500 1800 1810 18%
DABUR Buy 1 2000 400 375 25%
HEXAWARE Short 2 1000 650 647 30%
MARUTI Buy 2 150 7500 7560 20%
Derivative Indicators of TCS stock: (Table 1.2)
Future Change Change
Date Basis OI Future IV HV PCR OI
Price Price % OI %
01-Oct-18 2,260 3.0% 4.0 72,86,000 3.5% 32.8 30.3 1.08
03-Oct-18 2,175 -3.7% 12.3 80,03,500 9.9% 33.1 35.3 1.19
04-Oct-18 2,076 -4.6% 10.9 82,14,000 2.6% 39.7 40.5 0.88
05-Oct-18 2,113 1.8% 10.7 83,27,000 1.4% 38.5 40.2 0.85
08-Oct-18 2,089 -1.2% 11.4 82,47,000 -1.0% 45.5 39.4 0.83
09-Oct-18 2,099 0.5% 6.9 83,86,000 1.7% 45.6 38.3 0.85
10-Oct-18 2,044 -2.6% 0.8 89,14,500 6.3% 51.9 38.7 0.72
11-Oct-18 1,988 -2.8% 7.9 91,33,000 2.5% 52.1 40.4 0.59
12-Oct-18 1,922 -3.3% 4.1 1,00,31,500 9.8% 45.2 41.8 0.40
15-Oct-18 1,952 1.5% 2.2 99,51,000 -0.8% 40.2 41.3 0.40

Option Chain of TCS: (Table 1.3)


Strike Call Option Put Option
Price Price Price Chg OI OI Chg Price Price Chg OI OI Chg
1860 111 16 500 0 15 -17 10,500 2,000
1880 79 -9 500 -500 19 -20 32,000 6,500
1900 76 6 75,500 -34,500 25 -23 8,67,500 -77,500
1920 63 4 46,000 -24,500 31 -25 42,000 11,000
1940 52 2 1,09,000 35,000 41 -26 33,500 6,000
1950 47 1 2,63,500 -65,500 44 -28 1,70,500 -2,500
1960 42 0 85,000 16,500 52 -27 27,500 0
1980 34 -1 98,500 -2,000 65 -27 20,000 -7,500
2000 27 -2 10,68,500 -1,55,500 74 -32 2,21,500 -28,000
2020 22 -3 1,05,500 -9,500 94 -32 6,500 0
2040 18 -3 75,000 -2,500 118 -19 19,500 0
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Based on the information provided above, analyse the case for Mr. Peter for the following questions:
A. Calculate the Net Total Margin (Initial Margin + MTM) blocked for existing open positions. (5 marks)
B. Peter wants to trade in TCS, provide your analysis based on the changes in Basis, Price, OI, Volatility and
PCR OI from 1-Oct to 15-Oct. (5 marks)
C. In hindsight, seeing the changes in the price and IV, which strategies could have been deployed by Peter
between 1-Oct to 11-Oct, if he expected the uncertainty to arise in the TCS stock price. Justify your
answer. (4 marks)
D. Analyse the option chain of TCS (Table 1.3) with respect to the OI and the changes in OI at relevant
strike prices. (4 marks)
E. Considering the price change in TCS from 12-Oct to 15-Oct and knowing the basis, calculate the Net
Delta change for 1950 strike price put option. (2 marks)

Q.2. [10 MARKS]

A. State the objective of different types of market participants – Speculator, Hedger & Arbitrageur?
(3 marks)

B. Explain the role of Arbitrageur with example. (7 marks)

Q.3. [10 MARKS]

A. What are the factors which affect the option pricing? Show the change in the option premium for Call &
Put option if each of the factors were decreased. (6 marks)

B. Calculate the Payoff Table for the following strategy for different expiry levels.
Short Future @ 1190
Long 1200 CE @ 54
Sell 1300 CE @ 12
Calculate the payoff for the above strategy, if the stock expires at 1080, 1315, 1420 & 1220. (4 marks)

Q.4. [10 MARKS]


Call Option Greeks
Strike Call Price Put Price
Delta Theta Vega Gamma
1880 79 19 0.83 -1.00 0.82 0.0032
1900 76 25 0.69 -2.04 1.15 0.0031
1920 63 31 0.62 -2.21 1.23 0.0033
1940 52 41 0.55 -2.26 1.28 0.0035
1950 47 44 0.52 -2.30 1.29 0.0035
1960 42 52 0.48 -2.31 1.29 0.0034
1980 34 65 0.42 -2.28 1.26 0.0033
2000 27 74 0.35 -2.20 1.20 0.0031
2020 22 94 0.30 -2.09 1.12 0.0029
Analyse the following questions, based on the above information of stock AVENGERS.
Note: Assume the non-required parameters in each sub questions to remain constant for calculating the
answers.

A. Mr. Strange created a Long Combo strategy by Buying ATM 1950 strike CE option @ 47 and Selling ATM
1950 strike PE option @ 44. The spot price and future price are trading at par at 1950 currently.
Calculate the Net Delta for this strategy if the underlying price moved from 1950 to 1951 in few
minutes after executing the Long Combo strategy. (4 marks)

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B. Mr. Hulk wants to understand the impact on the price of 1920 CE option, if next day the volatility of the
stock increased from 14% to 15.50% and price remaining constant. Calculate the net change in the
option price. (2 marks)

C. Calculate the Net Delta change for Mr. Loki for his position in OTM 1980 strike CE option, if the
underlying price moved higher from 1950 to 1952 on the next day. (2 marks)

D. Calculate the change in the option premium for Mr. Ultron for his short position in 1880 strike CE
option, if next day the spot price moved from 1955 to 1956 and the volatility reduced from 15% to 14%.
(2 marks)
Q.5. [10 MARKS]
A. Seagull, an MNC hedge fund in India wants to exit (sell) PACF stock from its portfolio. They are holding
1,50,000 shares for the same. The quantity freeze for this stock is 72,000 shares. The below are the best
five Bid-Ask prices trading at SNE exchange. Calculate the Impact Cost. (6 marks)
NSE
Bid Rates Ask Rates
Shares Price Price Shares
38000 620.05 620.55 35000
55000 619.90 620.75 68000
17000 619.50 621.05 72000
38000 619.05 621.60 108000
74000 618.70 621.95 28000

B. The below is the rollover details of last three months for Telecom sector stocks.
Price Rollovers Qty (OI in crore)
Stock
Jul Aug Sep Jul Aug Sep
BHARTIARTL 357.35 385.25 359.05 4.74 4.76 4.81
IDEA 57.25 50.35 38.80 13.34 15.27 17.49
INFRATEL 288.30 285.25 270.35 0.66 0.65 0.41
TATACOMM 570.00 564.50 508.10 0.32 0.36 0.40
a. Seeing the individual stocks rollover with price change, what is your overall view on the sector?
(3 marks)

b. Calculate the total base of rollover OI for the sector towards the start of the October series?
(1 mark)
Q.6. [10 MARKS]
A. Explain the difference between a Protective Put and Covered Call option strategies. Based on the
strategy construction, comment in what scenario you will be comfortable to deploy these strategies.
(6 marks)
B. Match the column: (4 marks)
a. Beta 1. Liquidity Risk
b. VaR 2. Systematic Risk
c. Improper 3. Unsystematic Risk
Execution
d. Assignment Margin 4. Probability of loss, based on historical price trends and volatility
e. Initial Margin 5. Operational Risk
f. Wide Bid-Ask 6. Buyer of Future
spread
g. Risk can be reduced 7. Buyer of an Option
through
diversification
h. Limited Risk 8. Writer of an Option
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