Date: 17/10/2015

Indian Institute of Technology Roorkee

End Semester Examination
IBM-302 Banking and Bank Finances
Duration: 3 hours

Max. Marks: 50

Answer any five. If all six are attempted, the first five will be evaluated.
1. Consider three firms, A, B and C, where A and C want to be exposed to floating interest rates
while firm B wants to be exposed to fixed rate. The fixed and floating rates offered to the firms
are given in the following table. Find out the pairs that can get into a swap and which swap
solution will finally take place. Also work out the swap solutions for them.
(10)
Firm A
Firm B
Firm C

Fixed rate
5%
10%
12%

Floating rate
LIBOR
LIBOR + 100 bsp
LIBOR + 200 bsp

2. Suppose, return from financial assets in India is 11% and it is 5% in the US. An investor, Mr. X
has Rs 10000 to invest either in Indian market or in the US market for one year. The current
exchange rate is 62/$.
(3+4+3=10)
i. Will he invest in the US if he expects rupee to appreciate? Why?
ii. By how many basis points rupee should appreciate or depreciate to ensure at least as
much return from the US as from India?
iii. If Fed (the US central bank) implements policies to tighten liquidity in the US economy
then how that may affect Mr. Xs expected returns if he invests in the US?
3.
i.

ii.

Answer the following:

(5+5=10)
In India at McDonalds a vegetable puff costs Rs 25. The same costs 29 Thai Baht in
Bangkok. If the exchange rate is 2.1 rupee per Thai Baht, calculate the real exchange rate.
State which country is more expensive.
Find out the price you might have paid for a 2 percent coupon bond with Rs 100 face
value and 12 years term that you sold after 5 years; interest rate is 6 percent for the entire
period.

4. Explain with examples:

(5 2 = 10)
i. Buy a put and a call at the same strike price, and it pays off if the underlying asset price
moves up or down significantly.
ii.
During the heyday of hawala transactions in 1990s, it was a common knowledge that
exporters under invoiced their export earnings and importers over invoiced their imports.

5. Describe the stages of financial crisis in emerging economies.

PTO
(10)

6. Consider an American call option with spot and strike prices at 91 and 100, and it expires in 2
months. If spot price is expected to increase or decrease every month by Rs 5 with equal
probability
(3+3+1+3=10)
i. Calculate the price of the call option. Calculate the intrinsic and time value separately.
ii. Calculate the option price if it is an American put option; other information remains the
same.
iii. How option price will vary if it is a European option? Calculate the prices for both call
and put options.
iv. Calculate option price for American call option if spot price has 10 percent chance of
moving up or down and the option expires in 1 month.