Finance and Treasury Management
PART- A
Q1. “Futures rely on a great deal on expected spot
prices. The theoretical “framework suggests that forward rates reflect the
expected spot rates.” How futures differ from forwards?
Explain.
Q2. “Arbitrage profits” an investor told
are risk less profits. You take simultaneous but opposite positions in two
markets to reap gains from pricing disparities. Acting on this belief, his
friend tried to find the arbitrage profit by trading simultaneously in futures
and stock index.
He has collected to the following
information:
• Pricing level of stock index - 3000
• Index futures priced at 2000
• Risk free rate of return - 10%p.a.
• 50% stocks are to pay dividends at 6%
• The index futures has a multiple of 100
• The future has six months to expiration.
Required
(a) Find arbitrage profits, if any.
(b) Discuss the risks associated with
arbitrage transactions in futures.
Q3.
The following are the requirement of the type of funds and the borrowing rates
faced by three companies X, Y, Z in different markets:
Company Requirement LIBOR
Rate T-Bill
rate Fixed $
X LIBOR
based funds LIBOR+.75% T-Bill+.4% 5%
Y T-Bill
Based Funds LIBOR+.5% T-Bill+.25% 4.5%
Z Fixed
$ LIBOR+1% T-BILL+.5% 5.5%
Three
companies approach a bank individually for swap deals so that they can reduce
their cost of borrowing. You are required to structure swap transactions
between three parties keeping Bank as an intermediary so that after keeping a
margin of 10 basis points V by the Bank for each leg of swap, the rest of the
gain is distributed equally between the three parties. Also, calculate the
effective cost of borrowing to the three parties.
Q4:
‘Option value is influenced by the option prices, which in turn depend on a
number of factors” What are assumptions made by Black and Scholes option
Pricing model? Also discuss how does option premium depends on time to
expiration, Interest rates, Spot prices and strike prices.
Q5:
(a)
The following options are quoted at the market:
Option Expiration Strike Price Premium
Call 1 Month Rs.48.5/$ Rs.0.30
Put 1Month Rs.48.5/$ Rs.0.05
A
trader is looking at the above options and planning to adopt long strip or long
strap strategy to make profit from the rupee-dollar exchange rate volatility.
You are required
to:
I.
Show the pay off profile and indicate break even points for strip and strap
strategies in a price range of Rs 47- Rs 50 for a dollar.
II.
Comment on the desirability of the above two option strategies.
Q5:
(b): Consider a call option on a stock with the following parameters
Stock
price: Rs210
Strike
Price: Rs 220
Time
to expiration: 167 days
Risk
free interest rate: 10 %
Variance
of annual stock returns: 20%
Compute price of
the call option
Case study
(a)
A newly opened bank with paid-up capital of Rs. 500/- crores and deposits
amounting to Rs. 500/- crores wants to take up treasury operations. Outline the
organizational set-up for the purpose.
(b) State whether the following
statements are true or false:-
(i) A perfect hedge of asset A
requires an asset B that is perfectly correlated with A.
(ii) Purchase of a future contract
involves payment now for delivery at a future date.
(iii) Holder of a financial futures contract
misses out on any dividend or interest payment made on the underlying security.
PART C
1.
Spot transaction is a transaction where exchange takes place:
(a) On the same day
(b) 2 Days later
(c) Some days later, say 1 month
(d) None of the above
2.
Derivatives are essentially:
(a) A simple forward contract
(b) Forward contracts with
special features
(c) Cash transactions
(d) None of the above
3.
The purpose of reducing the market yields to zero coupon yields is to:
(a) Eliminate difficult
calculations
(b) Eliminate reinvestment risk
(c) Eliminate basis risk
(d) None of the above
4.
Frequency of coupon payments and duration of a bond are:
(a) Directly related
(b) Inversely related
(c) Not related at all
(d) Randomly related
5.
The initial margin to be paid to trade in a Futures exchange depends on:
(a) Volatility of the price
movements of the underlying
(b) The spot price of the
underlying
(c) The forward rate of the
underlying
(d) None of the above
6.
The benchmark rate for interest rate swaps done in India:
(a) May be any domestic money or
debt market rate
(b) Must be only government
securities yields
(c) Must be only MIBOR
(d) None of the above
7.
In an overnight index swap, the:
(a) Settlement takes place on a
daily basis
(b) Settlement normally takes
place on the maturity date
(c) Settlement takes place at
the exact mid period of the swap maturity
(d) None of the above
8.
A credit derivative seeks to:
(a) Protect the market risk as
well as the credit risk of an asset
(b) Segregate the credit risk
from an asset and trade it separately
(c) Transfer the credit risk
along with the reference asset to the credit risk buyer
(d) None of the above
9.
Commercial Papers are valued at:
(a) Carrying cost
(b) Repurchase price
(c) Valued at cost
(d) Book value
10.
The spread should be marked up by……for unrated corporate bonds:
(a)
10%
(b)
15%
(c)
20%
(d)
25%
11.
G-Secs and State Government securities are evaluated on the basis of the
following:
(a)
Current Yield
(b)
Yield to Maturity
(c)
Duration
(d)
All of the above
12
The most important risks which it has to manage are:
(a)
Liquidity risk
(b)
Price risk
(c)Counterparty
risk
(d)
All of the above
13.
The treasury domestic operations include:
(a)
Extending cover to foreign exchange trade transactions
(b)
Funding and managing forex assets and liabilities
(c)
Providing hedge to forex risks proprietary and for its constituents
(d)
None of the above
14.
The treasury not only provides the interface between the bank and the external
market, it also provides an interface between the asset and liability groups of
the bank.
(a)
True
(b)
False
15.
Risk arising from time differences between trading zones:
(a)
Country Risk
(b)
Settlement Risk
(c)
Political Risk
(d)
Operational Risk
16.
Credit risk is:
(a)
An asset that cannot be converted into cash when needed
(b)
A generic term to describe both interest rate risk and event (‘systematic’)
risk.
(c)
This covers the entire gamut of the transaction cycle from dealing to custody.
(d)
The possibility of the issuer of a debt instrument being unable to honour his
interest payments and/ or principal repayment obligations
17.
VaR is
(a)
Derived from a statistical formula based on volatility of the market.
(b)
Applied to calculate the risk content of an individual security, foreign
exchange position, equity share or a portfolio of these instruments.
(c)
An estimate of potential loss, always for a given period at a given confidence
level.
(d)
All of the above
18.
Trading limits are:
(a)
Limits on deal size
(b)
Limits on open positions
(c)
Stop-loss limits.
(d)
All of the above
19.
The term government securities include:
(a) Government Dated Securities
(b) State Government Securities
(c) Treasury Bills
(d)
All of the above
20.
CCIL applies the concepts of:
(a)
Novation
(b)
Multilateral netting
(c)
Both (a) & (b)
(d)
None of the above
21.
Adequacy of a bank’s liquidity position depends upon:
(a) Sources of funds
(b) Anticipated future funding needs
(c) Present and future earnings capacity
(d) All of the above
22.
Objective of liquidity management is to:
(a) Ensure profitability
(b) Ensure liquidity
(c) Either of the two
(d) Both
23.
The ALM Support Groups consisting of operating staff should be responsible for:
(a)
Analysing the risk profiles to the ALCO
(b)
Monitoring the risk profiles to the ALCO
(c)
Reporting the risk profiles to the ALCO.
(d)
All of the above
24.
Front-office is responsible for:
(a)
Risk management, accounting and management information
(b)
Confirmations, settlement and reconciliation
(c)
Dealing
(d)
None of the above
25.
Mandates shall not be for a period of more than………unless otherwise specified
(a)
15 minutes
(b)
30 minutes
(c)
45 minutes
(d)
1 hour
26.
The dealers should enter the deals, concluded on the NDS or to be reported on
the NDS, within a period of………. of the conclusion of the deal.
(a)
30 minutes
(b)
45 minutes
(c)
15 minutes
(d)
1 hour
27.
Money market is a center in which financial institutions congregate for the
purpose of dealing impersonally in monetary assets.
(a)
True
(b)
False
28.
For settlement purposes, CCIL requires a margin of………of the net debit cap to be maintained
in USD.
(a) 4.5%
(b) 5%
(c) 5.5%
(d) 6%
29.
The spread should be marked up by……for preference shares
(a)
10%
(b)
15%
(c)
20%
(d)
25%
30.
The basic objective of integration is to
(a)
Improve portfolio profitability
(b)
Risk-insulation
(c)
Synergize banking assets with trading assets
(d)
All of the above
31.
Integrated treasury is a………….center
(a) Profit
(a) Cost
(b) Profit / Cost
(c) None of the above
32.
Electronic records of ownership of securities are held by:
(a) DPs
(b) NDSL
(c) CDSL
(d) All of the above
33.
This is an electronic trading
platform for the following instruments:
(a)
Commercial Paper
(b)
Certificates of Deposit
(c)
Repos
(d)
All of the above
34.
Which of the following are the factors affecting interest rates?
(a)
Macroeconomic, social and political influences
(b)Exchange
control regulations and exchange rate policy
(c)
Balance of payment and balance of trade
(d)
Relative price and inflation
35.
Integrated treasury approach enables the bank:
(a) To optimize its
asset-liability management
(b) (b)capitalize arbitrage opportunities
(c) Both (a) & (b)
(d) None of the above
36.
The swap differentials of currencies may not reflect the interest rate
differentials because:
(a)
The Indian markets are not totally free from regulations.
(b)
The Indian financial markets will also behave in a similar way as the global
financial markets when full convertibility in capital introduced
(c)
Both (a) & (b)
(d)
None of the above
37.
The foreign exchange market is
(a)
Not a physical place
(b)
It is electronically linked networks of banks
(c)
A 24 hour market
(d)
All of the above
38.
The treasury structure for dealing department should consist of
(a)
Dealers
(b)Back
up staff
(c)
Trained Personnel
(d)
All of the above
39.
The Indian financial markets will also behave in a similar way as the global
financial markets when full convertibility in capital introduced.
(a)
True
(b)
False
40.
The treasury organization:
(a)
Review of the effectiveness of the current organization.
(b)
Adequacy of Treasury policy and procedures documentation,
(c)
Evaluation of procedures, and practices for effectiveness, appropriateness, and
security.
(d)
All of the above
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