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Financial Risk Management Question Paper

Financial Risk Management

Course:Bachelor Of Commerce

Institution: Kca University question papers

Exam Year:2010

UNIVERSITY EXAMINATIONS: 2009/2010
THIRD YEAR EXAMINATION FOR THE DEGREE OF BACHELOR OF
COMMERCE
CFM 306-F: FINANCIAL RISK MANAGEMENT- (day+ evening)
DATE: AUGUST 2010 TIME: 2 HOURS
INSTRUCTIONS: Answer question ONE and any other TWO questions
QUESTION ONE
a) What important role do speculators play in the derivative Markets? [3 Marks]
b) What is the motive for arbitrage? [3 Marks]
c) The gold price is $. 500. The three month interest rate is 10% p.a. and storage costs are $. 6 p.a.
What is the fair value future price of gold in 3 months? [3 Marks]
d) What would the Market notation be for a 6-month FRA starting in 3 months time? [3 Marks]
e) If a bank quotes you a price on an IRS for 5 years of 10.20/10.40 against 3-month JIBAR, and
you wanted to deal on that price to pay fixed for 5 years, which rate would you be paying?
[3 Marks]
f) How does an IRS differ from a FRA? [3 Marks]
g) Explain the following terms as used with futures derivatives
Contango [3 Marks]
Backwardation [3 Marks]
h) Discuss the following trading strategies involving options:
i) Straddle [2 Marks]
ii) A strip [2 Marks]
iii) A strangle [2 Marks]
2
QUESTION TWO (20 Marks)
a) Would you expect the volatility of a share index to be greater or less than the volatility of a typical
share? Explain your answer. [4 Marks]
b) What is a synthetic position? [4 Marks]
c) What are the three main elements needed to calculate future prices? [3 Marks]
d) List of additional factors which may influence the fair value price of a futures contract. [6 Marks]
e) What are the fundamental differences between index futures and individual equity futures?
QUESTION THREE (20 Marks)
a) What are you hoping for when you buy a straddle? [4 Marks]
b) Why would a floating rate borrower use an interest rate swap? [4 Marks]
c) Why would a fixed rate borrower use an interest rate swap? [4 Marks]
d) Discuss the types of financial risks in derivatives Market [8 Marks]
QUESTIONS FOUR (20 Marks)
a) What factors are considered when pricing an option? [6 Marks]
b) Define intrinsic value. [3 Marks]
c) What is the maximum gain as the seller of a call option? [2 Marks]
d) What view of the Market will you have if you write a naked call option [2 Marks]
e) What is the potential loss to the writer of a naked call option? [3 Marks]
f) Discuss the hedging strategy used in derivative Market [6 Marks]
QUESTION FIVE (20 Marks)
a) A share price is currently shs. 50. It is known that at the end of two months, it will be either shs. 53
or shs. 48. The risk free rate is 10% per annum. What is the value of a two month call option with a
strike price of shs. 49. Use n-arbitrage argument. [10 Marks]
b) You enter into a futures contract to buy maize corn for Kshs. 1500 per tonne. The contract is for
delivery of 100 tonnes. The initial margin is kshs. 120,000 and the maintenance margin is kshs.
60,000.
(i)What change in the futures price will lead to a margin call? [4 Marks]
(ii)What happens if you do not meet the margin call? [3 Marks]
(iii)In what circumstances can you withdraw shs.60,000 from the margin account?

Financial Risk Management Question Paper

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