BBA 8th Semester
Financial Derivatives Board Question Paper 2019

Arbitrage is a transaction designed to capture profits resulting from market efficiency.

The bid price is the price paid to the buy an option from a market maker.

Buying a call with a lower exercise price offers a greater profit potential than one with a higher exercise price.

The maximum value of a call is the stock price.

Higher volatility in stock price increases the value of both call and put options.

One party to a futures transaction does not bear the risk that the other party will default.

Nepalese derivatives market is regulated by Securities Board of Nepal.

A generic asset that expires on September 10 whose spot price as of June 10 is Rs 40. Assume that the annual compounded risk free rate is 6 percent. The price of futures must be Rs 40.74870.

An interest rate swap is a special case of a currency swap with both currencies being the same.

Legal risk is the risk that the government will declare derivatives illegal.

Describe the features of financial derivatives. Highlights the issues of derivatives market in Nepal.

From the following quotation, answer the questions given below.

Consider a stock of Lama Corporation (LC) that trades for Rs 100 per share. Call and put options on this stock have an exercise price of Rs 100 and they expire in 1 year. The risk-free rate is 12 percent per annum, and the standard deviation of the stock return is 16 percent.

Determine the value of put option on the LC's stock by using Black and Scholes Model. If the current value of the put option on the LC's stock is Rs 2, what should an investor should decide? [W=e^H]

A company enters into a short futures position in 10 contracts of gold at a futures price of $ 276.50 per ounce. Each contract is for 100 ounces. Spot price at the time of contract is 270.25. The initial margin per contract is $2,500. And maintenance margin is 2,000. Settlement price on the first day is $ 278.00 per ounce, second day is $ 281.00 per ounce, third day is $276.00, fourth day is $280.00, and fifth day is $275.00.

Required:
a. Calculate the daily gain or loss.
b. Calculate the cumulative gain or loss.
c. Calculate the margin account balance.
d. Calculate the margin call.
e. If investor does not deposit margin call, what will happen?

On a particular day, the September S&P 500 stock index futures was priced at 960.50. The S&P 500 index was at 956.49. The contract expires 73 days later.

a. Assuming continuous compounding, suppose the risk-free rate is 5.96 percent, and the dividend yield on the index is 2.75 percent. Is the futures overpriced or underpriced?
b. Assuming annual compounding, suppose the risk-free rate is 5.96 percent, and the future value of dividends on the index is $5.27. Is the futures overpriced or underpriced?

Consider a plain vanilla interest rate swap with payments every 180 days (assume a 360-day year) for one year. The upcoming floating payment is at 5 percent. The notional principal is Rs 100 million. The prices of Eurodollar zero coupon bonds are as follows:

The stock of Standard Chartered PLC is selling at Rs 500 per share and put option on this stock is available with the maturity period of one period from today. The strike price of a put is Rs 500 per share. It is expected that the price of stock one period from today will be either Rs 600 or Rs 400 per share. The risk free rate is 10 percent.

a. What should be the price of put today? Why do you think it is the fair price of put?
b. What do you mean by hedge portfolio? Can you create the hedge portfolio using puts and stocks?
c. Show that the value of hedge portfolio will be same for both stocks prices at expiry.
d. What should be the rate of return of hedge portfolio? Justify.
e. Suppose the put is selling for Rs 20 per share. Suggest a strategy and calculate the profit at expiry.

The following option prices were observed for a stock for July 6 particular year. Ignore dividend and assume that the stock is priced at 165.13. The expirations are July 17, August 21, and October 16. The continuously compounded risk-free rates are 0.0503, 0.0535, and 0.0571, respectively. The standard deviation is 0.21. Assume that the options are European. Possible stock prices at the expiration date are Rs 155, Rs 160, Rs 165, Rs 170, Rs 175 and Rs 180.