Sample Paper

Derivatives (End Term Exam)

Professor Ramesh Laxman

GMBA 2010-11, SP Jain Center of Management, Dubai – Singapore.

Open Book, Open Laptop, Answer in word & Excel

Duration 2 Hours

Marks – 50

Date: December 27, 2010

1) What are the uses of Derivatives? Explain each with an illustration. (10 Marks)

2) The NSE trades futures and options on various individual stocks. One such is SBI (NSE Code: SBIN). The maturity dates for December futures and options in 30^th December 2010. From the information given to you in the table below, answer the questions listed below

a. Details for SBI Stock & Futures and Options thereon

i. Spot – INR 2940.6

ii. Futures December – INR 2960.5

iii. Option CE Strike 3000 – 81

iv. Options PE Strike 3000 – 120

v. Historical Daily Volatility – 2.5

vi. Expected Dividend before December – Nil

b. Questions to be Answered:

i. Using the futures price, determine the interest rate for the period ending December 30^th, 2010

ii. Using the interest rate & volatility, determine the options price using the Black Scholes Option Pricing model for European options

iii. Determine the difference between theoretical price & the actual price. Under what circumstances you would like to trade the options and which one would you trade & why

iv. Give the market prices determine the implied volatility for the call & put

v. What conclusions can you derive from the implied volatility determined by you (Marks 15)

3) You are examining a proposal to hedge a bond in the forward market on 7^th December 2010. The bond is 7.02% G.Sec Stock 2016 maturing on 17^th August 2016. The current price of the bond is 96.2. The current OIS interest rate market is quoting 6.7 / 7.0 for one month and two months maturity, determine the forward price for the bond for the maturity 31^st January, 2011. (7marks)

4) The following Zero Curve is provided to you by the market. Using the information, determine the 4 year IRS price for bid & offer. The swap pays interest half yearly (13 Marks)

	Zero Rates (Bid)	Zero Rates (Offer)
1M	6.7	7
2M	6.7	7
3M	6.7	6.9
4M	6.71	6.87
5M	6.71	6.85
6M	6.72	6.82
7M	6.73	6.83
8M	6.75	6.85
9M	6.76	6.86
10M	6.78	6.86
11M	6.81	6.85
1Y	6.83	6.85
2Y	6.86	6.88
3Y	7.07	7.11
4Y	7.24	7.28
5Y	7.38	7.4
6Y	7.41	7.48
7Y	7.45	7.55
8Y	7.47	7.57
9Y	7.49	7.59
10Y	7.51	7.61

5) How do you use calls & puts to construct a forward contract and what other synthetics can be derived from the equation. (5 Marks)