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Fnce 423: Options And Futures Markets Question Paper
Fnce 423: Options And Futures Markets
Course:Bachelor Of Commerce
Institution: Kabarak University question papers
Exam Year:2012
KABARAK
UNIVERSITY
UNIVERSITY EXAMINATIONS
2011/2012 ACADEMIC YEAR
FOR THE DEGREE OF BACHELOR OF COMMERCE
FNCE 423: OPTIONS AND FUTURES MARKETS
DAY: THURSDAY
DATE: 9/08/2012
TIME: 9.00 – 11.00 A.M. STREAM: Y4S2
INSTRUCTIONS
1. Question ONE is compulsory
2. Answer any other THREE questions from the rest of the questions
3. Be clear and neat
4. Begin a new question on a new page
TIME ALLOWED 2 HOURS
Note:
Black Scholes Model:
C0 = S0N(d1) – Ee-rt N(d2)
Where :
d1 = {In (S/E) + (r +½d2)t}/v d2t
d2 = d1 - v d2t
And
P0 = C0 – S0 + Ee-rt
Attached: Cumulative probabilities of the Standard Normal Distribution Function
QUESTION ONE
a)
Consider a stock that trades at $75. A put and a call on this stock both have an
exercise price of $70 and they expire in 150 days. The risk free rate is 9 per cent
and the standard deviation for the stock is 0.35.
Using Black-Scholes model,
(i)
Compute the price of the options in the above scenario
(12 marks).
(ii)
If the value of the call was $15, how would an investor react? (2 marks)
(iii)
If the value of the put was $ 5, how would an investor react
(2 marks)
b)
List the limitations of the Black-Scholes option pricing model
(5 marks)
c)
Explain the meaning of a derivative citing relevant examples
(4 marks)
QUESTION TWO
a) Explain why derivatives were burned in parts of Europe and America in the early
19th century
(5 marks)
b) Discuss the reasons behind the growth of derivatives in many economies
(10 marks)
QUESTION THREE
a)
Distinguish between a swap broker and a swap dealer in the swaps markets
(4 marks)
b)
Assume a swap with a tenor of five years between investor A and Investor B. the
notional principal amount is shs. 1,000,000. Investor A is the pay fixed
counterparty and agrees to pay a fixed rate of 9% to investor B. Investor B, on the
other hand, agrees to pay a floating rate of LIBOR to investor A. At the time the
swap agreement is negotiated, the LIBOR stands at 8.50%.
Required:
(i)
If LIBOR at years 1, 2, 3 and 4 is, 8.80%, 9.65%, 11.25% and 11.75%
respectively, prepare cash flows for a plain vanilla interest rate swap in
the above scenario (8 marks)
(ii)
Calculate the total gains/losses for each of the investors during the
tenor of the swap (3 marks)
QUESTION FOUR
a) Explain the main types of futures contracts
(5 marks)
a)
With relevant examples, distinguish between Over the counter Derivatives and
Organized exchange Derivatives
(10 marks)
QUESTION FIVE
a) Consider a swap arranged between a U.S. and a Japanese firm. Assume that $1 is
worth ¥120 when the swap is negotiated. Let the notional amounts be $10 million
and ¥1.2 billion. Let the tenor be 5 years.
The Japanese 5 year fixed interest rate is 7% and the U.S. firm promises to pay
this fixed rate. On the other hand, the Japanese firm promises to pay one-year
LIBOR flat, which is currently 5%.
If LIBOR rates during the years 1, 2, 3, 4 and 5 were 6.5%, 7.2%, 6.8%, 5.5% and
8.4% respectively, prepare a plain vanilla cash flow for the swap
(10 marks)
b) Explain the relevance of currency swaps
(5 marks)
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