Q.1 State True or False in the answer column.
Give brief reason for your selection at the space provided
below the question: (07)
(Answer)
i |
The value of a call option on
a share increases with the price of the share. |
|
ii |
The payoff on expiry of a future on a currency
is the same as that of an option on the same currency. |
|
iii |
The delta of an option measures the sensitivity
of the options value with respect to the price of the underlying.
|
|
iv |
Vega measures the sensitivity of an option
with respect to the risk-free interest rate. |
|
v |
An upward sloping yield curve shows that
the market expects the interest rates to rise. |
|
vi |
An option is priced by discounting the expected
payoff at the risk-free rate. |
|
vii |
A perfect hedge is one that completely eliminates
the risk. |
|
Q.2 Please write the alphabate of selected
choice in the answer column: (18)
(Answer)
i |
A call option on a stock with
3 months to maturity has a premium of Rs. 10. The strike price
is Rs. 40. The continuous risk free rate is 0.022 and the current
stock price is Rs. 39. Calculate the price of a put on the same
stock with the same strike price and the same time to maturity.
A) 10.78 B) 9.78
C) 11.78 D)
8.78
E) None of the above |
|
ii |
An option strategy to buy a call and a put
on the same underlying, with the same strike price, with the same
expiration date is known as:
A) Box spread B)
Butterfly spread
C) Straddle
D) Strangle
E) None of the above |
|
iii |
A futures option is
A) a future on an option B)
an option on a futures contract
C) a simple futures contract D) there
is no such thing as a futures option |
|
iv |
A call option where the asset price is greater
than the strike price is known as:
A) in-the-money option B)
out-of-the-money option
C) at-the-money option D)
under-the-money option
E) below-the-money option |
|
v |
An exchange of a fixed rate of interest on
a certain notional principal for a floating rate of interest on
the same notional principal is know as:
A) Exchange derivative B)
Exotic option C) Interest
rate swap
D) Swaption
E) Binary option |
|
vi |
For a call option if the value of the underlying
asset is greater than the strike price what will the difference
between the asset price and the strike price called:
A) Actual value B)
Real value C)
Original value
D) Intrinsic value E) None
of the above |
|
vii |
The value of the volatility of an asset calculated
from the market price of an exchange traded option is known as:
A) Implied volatility B)
Garch volatility
C) Arbitrage volatility D)
Risk-free volatility E) Integrated
volatility |
|
viii |
For a floating rate payer in an interest rate
swap agreement
A) The value is found by subtracting the value
of a floating rate bond from a fixed
rate bond.
B) The value is found by subtracting the value of a fixed rate
bond from a floating rate bond.
C) By calculating the difference between each payment and summing
the differences.
D) By calculating a forward curve and adding up the rates.
E) None of the above |
|
ix |
An option with a clause to exercise anytime
before and on the date of expiry is know as
A) European option B)
Asian option
C) American option D)
Hong Kong option E)
Australian option
|
|
x |
Black-Scholes-Merton model assumes which distribution
for the stock price
A) Pareto distribution
B) Poisson distribution
C) Lognormal distribution D)
Exponential distribution
E) None of the above
|
|
xi |
A method of insuring a portfolio that has more
or less the same mix as the market index is:
A) Buying an index put option B)
Selling an index put option
C) Buying a treasury bill of 6 months to maturity
D) Buying and selling a call and a put of the same characteristics
E) None of the above |
|
xii |
Max[(S-X),0]
S = Stock price at maturity
X = Strike price
The above is the payoff of a:
A) A European put option B)
A European call option
C) A long futures contract D)
A short futures contract
E) None of the above |
|
xiii |
A tree where each nodes extends to two other
nodes is known as:
A) A gamma tree B)
A trinomial tree
C) A risk-neutral tree
D) A delta tree
E) A binomial tree
|
|
xiv |
A trading strategy that takes advantage of
two or more securities being miss priced relative to each other
is known as:
A) Hedging
B) Cut and exit C)
Arbitrage
D) Long on a bounce E)
Short on a break |
|
xv |
The sensitivity of an option with respect to
the interest rate is known as:
A) Delta B) Gamma
C) Vega D)
Theta E)
Rho |
|
xvi |
The delta of a derivative is 1.5. The price
of the underlying asset is expected to move by Rs. 10 in the next
month. What is the expected value of the derivative in the next
month assuming all else remain constant?
A) Rs. 11.5 B)
Rs. 12.5 C) Rs.
13.5 D) Rs. 15 E)
Rs. 17
|
|
xvii |
An instrument whose price depends on, or is
derived from, the price of another asset is known as a:
A) Treasury bill B)
Equity
C) Fixed income security
D) Commercial paper E)
Derivative
|
|
xviii |
The average increase per unit of time in a
stochastic variable is known as the:
A) Drift rate B)
Volatility C)
Covariance
D) Delta E)
Standard deviation |
|
Q.3 Briefly describe following with
at least one business example:
(08)
A)
Forwards B) Futures
C) Options D)
Swaps
Q.4 Suppose that Zero interest
rates are as follows: (04)
Maturity
Rate
(months)
(%
p.a.)
3 8.00
6
8.20
9 8.40
12 8.50
15 8.60
18 8.70
Calculate
forward interest rates for the second, third, fourth and sixth quarter.
Q.5 What
is the difference between Forward and Future market. Briefly describe
main components of Future Market. (06)
Q.6 Briefly
describe the Regulatory frame work governing derivative business for
commercial banks in Pakistan. (06)
Q.7 Is
there any difference between Interest Rate Swaps and Forward Rate Agreement
? Support your answer with technical arguments. (06)
Q.8 An
importer wants to hedge Pound Sterling payment of 1,000,000 which is
due in one months time. Market shows following information
Spot GBP/USD 1.8900
Forward Premium GBP / USD
0.00075
Option premium 0.011
pence
Option strike price 1.895
If you expect that the Pound Sterling rate
against USD would be 1.91 at the time of the payment. Give advise to
your customer what alternatives he has to hedge his payment and what
will he gain or loose in each alternative. (05)
Q.9 You
write a put contract with a strike price of Rs. 40 / share with an expiration
period of 3 months. You charged an upfront premium of Rs. 1 / share.
What is your gain / lose if price is at Rs. 50/share on maturity date.
(05)
Q.10 Your
customer wants to borrow Rs. 100 million after 3 months for 6 months.
The yield curve and forward curve show an upward slope, as given below,
and its expected that the rate would be at 12% mean. What would you
advise to your customer and why? You may use the information given below
to support your answer. (05)
3 months 11.5%
9 months 12.5%
Q.11 Your
customer has borrowed Rs. 100 million in 1 year term loan at 12% fixed
rate payable semiannually. You are also running a mismatch position
and financing the above loan from 6 months deposits / borrowings that
is attached to 6 months KIBOR. Will you suggest some hedging strategy
to your management or let the situation be as is basis. Show your calculations
and give numerical evidence of viability of the hedging solution using
the information given below. (10)
Term KIBOR
Rate
6 months 11.225%
1 year 11.45%
1.5 years
11.88%
1
year zero-coupon yield = 10%
Q.12 Financial Derivative
Business Regulation of State Bank of Pakistan stated: (20)
“Internal trading limits set up duly approved
by the respective Board of Directors (in case of locally incorporated
entities) or head office/regional office (in case of entities incorporated
outside Pakistan) these limits should be inline with the capital structure
of each institution and its risk appetite on such position at a minimum
the position limit may be expressed in terms of Price Value per Basis
Point (PVBP) or Value at Risk (VaR) of the portfolio and supplemented
by stop loss level on a monthly basis”
Describe & comments on the above requirements.