Group A

1. A US corporation is considering entering into a currency swap that will call for the firm to
pay dollars and receive British pounds. The dollar notional principal will be $35 million. The
swap will call for semiannual payments using the adjustment factor of 180/360. The
exchange rate is $1.6/£. The term structure of dollar LIBOR and pound LIBOR are as follows:
Term Dollar LIBOR Pound LIBOR
180 days 7.00% 6.50%
360 7.25 7.10
540 7.45 7.50
720 7.55 8.00
Answer the following questions.
a. Determine the appropriate pound notional principal. Use this result in each of the
remaining questions.
b. Determine the fixed rates in dollars and in pounds.
c. Determine the first net payments of the swap for US Corporation when both parties are
paying in fixed rates.
d. Now assume it is 120 days into the life of the swap. The new exchange rate is $1.42/£. The
new term structures are as follows:
Term Dollar LIBOR Pound LIBOR
60 days 6.80% 6.40%
240 7.05 6.90
420 7.15 7.30
600 7.20 7.45
Determine the value of swap for US Corporation when both parties are paying in floating
rates.

Group B
2. The Price of Nabil bank common stock had been hovering around Rs. 40 per share for a long
time and Pramod thought the stock was poised for a big move and continued in future. He
sells a call option with an exercise price of Rs. 40 expiring in March 2007 for premium of Rs.
5 per share. In addition, he sells a put option with an exercise price of Rs. 40 expiring March
2007 for a premium of Rs. 3 per share.
a. What is the name of the position Pramod has taken?
b. What is the total receipt from the position?
c. Construct a table showing Pramod’s gain or loss at Rs. 10 price interval on stock from Rs.
20 to Rs. 100
d. Construct the graph for the position?
 e. Determine the breakeven price for Pramod?
3. Kathmandu Laboratories Inc. is a new high technology company whose common stock sells
for Rs. 23 per share. A call option exists on this stock with 3 months to expiration. It has an
exercise price of Rs. 18 and sells for Rs. 5.30. You have made a careful study of the stock’s
volatility and conclude that a standard deviation of 0.50 is appropriate for the next 3
months. Currently, the risk free rate of return is 6%.
a. Determine the value of Call Option.
b. Is the option overvalued, undervalued or fairly priced? If so, what will be your decision?
c. Determine the value of Put option using put call parity theorem.
d. Explain each of the variables used in BSM and its effect on option pricing.

4. What is financial derivative? Explain the importance of financial derivatives to the investors
and dangers of derivatives to be understood by investors.

Group C
5. Explain the differences between forward contract and future contract.
6. Consider the following three put options:
Option Exercise Price(E) Stock Price(ST)
1 Rs. 40 Rs. 50
2 50 50
3 60 50
a. Indicate which option is in-the-money, at-the-money and out-of-the-money.
b. Calculate the intrinsic value of each option.
7. The stock of Western Telephone, a manufacturer of telephone sets, sells for Rs. 500 per
share. Options exist which permit the holder to buy one share of Western at an exercise
price of Rs. 400 per share. These options will expire at the end of one year at which time
Western’s stock will be selling either at Rs. 800 or Rs. 200 per share. Assume the risk free
rate is 5%.
a. Find the value of call option.
b. Show how could you earn arbitrage profit if market price of call were (i) Rs. 220 (ii) Rs.
180.
8. An investor enters into short futures contract to sell January cotton for Rs. 150 per Kg on
the Mercantile Exchange. The size of contract is 500 Kg. Initial margin its Rs. 40,000 and
maintenance margin is Rs. 300,000. What price will lead to margin call to investor? What
happen if investor does not deposit margin amount?
9. What is hedging? Discuss the fundamental principle of hedging.
10. Write in one sentence
a) Define Option Contract.
b) What is basis risk?
c) From the following quotation, answer the following questions below:
Calls Last Sale Net Bid Ask Vol Open Int
07 Sep 80 7.5 +0.5 7.0 8.8 770 10554
i) Which Option is it and when will it expire?
ii) What is the exercise price of the option?
d) What is long position and short position?
e) What is LIBOR?