NOBLE GROUP OF INSTITUTIONS

DEPARTMENT OF MANAGEMENT
Time: 10:30AM – 01:30PM RISK MANAGEMENT (2840202)
Date: 21/05/2018 PRE FINAL EXAMINATION Marks: 70

Q. 1 (a)Attempt the following multiple choice questions: 06

1. Using the future contract to transfer price risk is called?
A. Speculating B. Hedging C. Diversifying D. Arbitrage

2. The put option has a strike price of Rs. 35 and the price of the underlying asset if Rs. 42 the option is?
A. In the money B. Out of the money C. At the money D Near the money

3. Which of the following has a right to sell the asset at an underlying price?
A. The call buyer B. The call writer C. The put buyer D. The put writer

4. The position by which the future contract is terminated by a contract that is equal and opposite by one that has
initiated the position is called
A. Open interest B. Delivery C. Offset D. Terminated

5. Type of swaps in which fixed payments of interest are exchanged by two counterparties for floating payments of
interest are called
A. float-fixed swaps B. Interest rate swap C. Indexed swap D. Counter party swap

6. Agreement between two parties to exchange cash flows in future and cash flows are based on underlying instruments
is classified as
A. Swaps B. Future C. Forward D. Option

Q.1 (b) Explain the following terms: 04

1)Intrinsic value of option 2)In the money options 3)Imperfect Hedge 4)Static Hedging

Q. 2 (a) Write a note on FRA supporting with example 07

Q.2 (b) Explain various Greek letters in Options. 07
OR
(b) What is SWAP? Discuss different types of swaps. 07

Q.3 (a) What are exotic options. Explain any 5 in detail 07

(b) An investor holds shares of Suzlon worth Rs 20 lacs which has standard deviation of returns at 25% with beta of 1.5.
The standard deviation of market returns is 16%. Index futures on NIFTY is price at 4,000 with contract size of 50. If
investor hedges with the futures find out what position he must take in NIFTY futures. Also find what risk the investor
would face in the hedged portfolio. 07
OR
Q.3 (a) Explain in detail credit derivatives. Explain its types 07
(b) As an exporter you expect to receive 3 months from now US $ 20,000. The spot price of US $ is Rs 50.00 while 3-m
futures at NSE is trading at Rs 49.30 indicating depreciation of US dollar. Under what circumstances would you like to
hedge? What would be the hedging strategy? 07

Q.4 (a) Write a short note on historical simulation for calculating VaR. Support your answer with an example 07

(b) An industrial firm uses tin as raw material and has a requirement of 400 kgs of tin to be procured 6 months from
now. The prices of tin are expected to rise substantially. The firm needs to hedge against the price rise. There are no
derivative contracts available on tin but futures contract on aluminium are popular. The prices of aluminium and tin are
strongly correlated. A study has revealed that standard deviations of prices of tin and aluminium are 21% and 20% of
their current prices of Rs 720 per Kg and Rs 90 per Kg respectively. The coefficient of correlation is placed at 0.95. One
futures contract on aluminium is for 1,000 Kg. How can the firm hedge? 07
OR
Q.4 (a) Explain the concept of moneyness in options. How it affects the options premium? 07
Q.4 (b) A trader in gold hold stock of 1 Kg valued at Rs 15 lacs at the spot price of Rs 15,000 per 10 gms. The 3-m futures
contract for size of 100 gms on gold is Rs 15,400 per 10 gms. In order to protect against the fall in value of the gold the
trader decides to sell 10 contracts in gold for 3-m delivery. However after one month the trader is required to sell the
stock of gold at Rs 14,500 and therefore also cancels his position in futures at Rs 14,700. Find out the price the trader
realised. 07

Q.5 (a) Calculate MTM for a future contract of 250 shares of Tata Steel for 5th June to 18th June, 2014. Mr. X took long
position in Tata Steel Future on 5th June, 2014 at Rs. 385.60 per share. Mr. X sold Tata Steel Future on 18th June at Rs.
399.20 per share. The closing price for Tata Steel on each day are as under: 07
5th June 386.10 11th June 398.60 17th June 389.20 6th June 389.90
12th June 401.10 9th June 383.20 13th June 376.10 10th June 393.10
16th June 381.60

(b) Calculate the value of call option by using Black and Scholes model with the following data
Spot Price = Rs. 1272; Strike Price = Rs. 1280; Continuously compounded rate of interest = 8% p.a.
Time to expiration = 91 days; S.D. of the continuously compounded rate of return=0.2 07
OR
Q.5 (a) Company X wishes to borrow U.S. Dollars at a fixed rate of interest. Company Y wishes to borrow Japanese yen at
a fixed rate of interest. The amounts required by the 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: 07
Yen Dollars
Prepare a Currency Swap on the
Company X 5.0 % 9.6 %
basis of above data
Company Y 6.5 % 10.0 %

Q.5 (b) A stock price is currently Rs.100.Over each of the next two three-month periods it is expected to go up by 10 %
or down 10 %.The risk free interest rate is 8 % per annum with continuous compounding. What is the value of a six-
month European call option with a strike price of Rs.100? Use risk neutral Valuation 07