JUNE 2009 EXAMINIATION

DFM07 OPTIONS FUTURES AND OTHER DERIVATIVES Time : Three Hours Maximum Marks: 100

NOTE: The paper is divided into two sections. Section A and Section B. Three are seven questions in Section A. Students are required to attempt four questions from Section A and Section B is compulsory. Each question carries 20 marks SECTION - A 1. 2. Explain the different types of Swaps used in derivatives market and their role in the functioning of the derivative market? (20) Derivatives are an overkill , they do more harm than good Explain. (20) Stock

3. Describe the salient features of Options on individual securities at the National Exchange. (20) 4. 5. risks? 6. a) Distinguish between a perfect hedge and a cross hedge. b) Distinguish stock index options from Stock Index futures option. (10+10)

What are the main investment attractions of put option and call option? What are the key (20) a) Explain how options can be used to hedge the value of a stock holding against decline in Share Prices. (10) b) It is more attractive to trade a derivative security than the security itself Explain. (20) Compute a call option price by applying the Black Scholes Option Pricing Model on the following values; Strike Price Rs.45 Time remaining to expiration 183 days Current Stock Price Rs, 47 Expected Price Volatility Standard Deviation 2.5 Risk free rate 10 % (20) SECTION - B CASE STUDY A stock is currently selling for Rs. 60. The call option on the stock exercisable a year from now at an exercise price of Rs. 55 is currently selling the cost of at Rs 5. The risk free interest rate is 12%. The stock can either rise or fall after a year. What would be the gain or loss if the stock price rises to 30 percent and falls by 20 percent? (20) **************

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