MBA – 4th Semester | Paper: Financial Derivatives

Subject Name: Financial Derivatives

Full Marks:30 Duration: 1 Hour

Part – A

Attempt 5 questions
Each question carries 2 Marks (2 X 5)

1. What do you mean by Hedge ratio?


1. What is the benefit of having options trading oppotunities in

financial market?

2. Write the formula for put option value using one period binomial

model with notations.


2. Define the term ‘hedge ratio’.

3. Define the term ‘basis’. What is the ‘basis’ at maturity of a       futures contract?


3. What do you mean by historical volatility?

4. What are the two most common models available for valuation of



4. Define the term ‘open interest’.

5. What is ‘cash and carry arbitrage’?


5. What do you understand by a ” Put” option?

6. Define a forward contract.


6. What is the full form of NCDEX?

7. Why OTC instruments are more risky in nature?


7. What is expiration date in options contract?

8. What is the full form of MCX?


8. What is meant by the term ‘continuous compounding”?

9. What is meant by the term ‘Offsetting contract’?


 9. What is meant by hedging? Illustrate.

10. When does it never pay to exercise an American Call option before

its expiration?


10. Compare physical delivery vs Cash settled options.

Part – B

Attempt 6 questions

Each question carries 5 Marks (5 X 6)

11. How can long butterfly spread be done with put options?


11. A non-dividend paying stock is trading at Rs 120. The one year forward contract price for the stock is 123. The risk free rate of interest is 5%. Is arbitrage possible? If yes, how?

12. What does ‘vega’ represent as option Greek and what are the

significance of high and low vega?


12. what do you mean by long stock and short call hedge?

13. Differentiate between bull spread and bear spread.


13. if a put option is selling at Rs. 4.80, underlying share price is Rs. 67 5 and exercise price is Rs. 70, how an arbitrageur can make profit out of this?

14. Differentiate between a speculator and arbitrageur.


14. Explain how Binomial model can be represented using binomial


15. The current price of Bharti’s share is Rs 800. An investor ‘A’ is ready to buy one share at Rs 900 for future delivery after 6 months. ‘A’ goes along with the contract. After 1 month another investor ‘B’ offers to buy the Bharti’s share at Rs 925 for delivery after 5 months. If the risk free rate is 9% p.a., what is the value of the forward contract that investor ‘A’ is holding?


15. What are the main assumptions underlying Black and Scholes model?

16. The price of equity shares of Company X (non dividend paying) is Rs 30.The risk free rate is 12% p.a. with continuous compounding. An investor wants to enter into a 6 month forward contract. What is the forward price?


16. What do you mean by strips and straps as trading combinations with 5 options?

Part – C Attempt 5 questions

Each question carries 10 Marks (10 X 5)

17.An investor wants to buy stock in Co. X worth 40 lakh due to its very good past return. However, the market in general is considered to remain weak for about next six months. The beta of the stock is 1.3 and the current value of NIFTY is 21250. A 6-m index futures contract is selling at 21410.

(a) Plan a strategy so that the investor can hedge himself against the expected fall in the market.

(b) Analyze his position if the market actually registers a rise of 6% after 6months.


17. A call option is there involving 200 shares due to mature and selling 10

for Rs. 3.25. Market price of the share being Rs.66 and strike price Rs. 62. How much profit can be made from this option trading?

18. A call option on a stock with an exercise price of Rs. 70 is available

for Rs. 6 while a put option, on the same stock with the same expiration date,

with an exercise price of Rs. 60 is selling for Rs. 8. How can a strangle be created by using the options?

Determine the profit/ loss function for this strangle.

For What range of Stock prices would there be a profit?


18. Prepare the margin account of investor using the given information and calculate the net profit/loss.

Position: long

Stock: Tata Consultancy Services (TCS)

Number of shares: 200

Unit Price: Rs. 3500

Initial margin: 18%

Maintenance margin: 70% of initial margin Date of contract: March 1

19. Explain the concept of Straddle with the help of a graph.


19. The given inputs of a company’s share are:

current share price Rs. 120, exercise price of option Rs. 115, expiration period three months, standard deviation of the continuously compounded rates of return is 0.6, continuously compounded risk free interest rate 0.10. Calculate the value of the call using Black Scholes model. (reference can be made to the table of the area under normal curve).

20. Discuss in details about the interpretations of delta as a significant by 10

product of Black & Scholes model.


20. with the help of graphs discuss the buy and sell payoffs for put


21. Presently, the market price of Titan Company Limited (TITAN) shares is Rs. 1200. Investor ‘A’ has expressed an interest in acquiring one share for Rs. 1300, intending delivery after 5 months. Subsequently, another investor, ‘B’, has offered to buy the Titan share at Rs. 1350, with delivery expected after 4 months. With a risk- free rate of interest set at 9% per annum, evaluate the value of the forward contract held by investor ‘A‘.

21. A non-dividend paying stock is trading at Rs 120. The One year 10 forward contract price for the stock is 128. The risk free rate of interest is 5%. Is arbitrage possible? Explain what type of arbitrage can be done in this case and how?

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