DFM10
Financial Risk Management
Assignment – I
Assignment Code: 2015DFM10A1 Last Date of Submission: 15th May 2015
Maximum Marks: 100
Attempt all the questions. All the questions are compulsory and carry equal marks.
Section-A (50 marks)
Q.1. What are the different types of risk influences on investment? Explain systematic and unsystematic risks.
Q.2. a. What is IST? What is its biggest challenge? (10 Marks)
b. What steps has IST followed to meet its biggest challenge? (15 Marks)
SECTION B (50 Marks)
Case Study
The UK Treasurer of A H Corporation expects to receive a payment for wool exports to a customer in Munich in 3 months time. Her marketing department has sold 1000 “ 100 % Wool suits” for a delivered price of 250 Euros each. In the financial times on 10th June she reads the following:
Spot FX Rate 0.850(Euro/Pound)
3 month Forward FX Rate o.853(Euro/Pound
Pound 3 month interest rate
Annualised r=5(9/16) (=0.055625)
Euro 3 month interest rate
Annualised r=7(1/16) (=0.07625)
Questions
a) Explain using the above data how the Treasurer can hedge her receipts in Euros by
i) taking forward cover
ii) taking money market cover
b) What would be the amount of Sterling received if the Treasurer took an uncovered (open) position and the spot rate in 3 months time are as follows:
i) 0.653(Euro/Pound)
ii) 0.658(Euro/Pound)
iii) 0.640(Euro/Pound)
In each case, compare the hedged outcome with the uncovered outcome.
c) Does the set of interest and exchange rates prevailing on 15th June conform with covered interest parity? If not, explain how equilibrium will be established in the relevant markets.
DFM10
Financial Risk Management
Assignment – II
Assignment Code: 2015DFM10A2 Last Date of Submission: 15th May 2015
Maximum Marks: 100
Attempt all the questions. All the questions are compulsory and carry equal marks.
Section-A (50 marks)
Q.1. Explain the development and regulation of derivatives markets in India. Support your answer with examples.
Q.2. How are the prices determined in futures contract? Who are the major players in Future market in India?
SECTION B (50 Marks)
Case Study: Calipso Capital Consultants
Calipso Capital Management (CCC), an investment management firm with offices throughout Ohio, is headquartered in Cincinnati. CCC normally actively manages accounts for high-income individuals with assets of $500,000 or more. Peter Myers, managing director of CCC, thought the increased interest of clients in security op¬tions required more than routine advice because he knew that many clients did not fully appreciate the risks and hedging aspects of buying and selling puts and calls. He had personally spent many hours explaining the vocabulary and technical trad¬ing aspects of option vehicles to clients who found the area exciting but nonethe-less arcane.
EXHIBIT 1
Bio-Genetics Corp. Option Quotes
STOCK PRICE: 162
CALLS PUTS
STRIKE
PRICE APR JULY OCT APR JULY
140 23
150 16 21 25 1 4
160 9 14 20 3 7
170 3 9 13 9 10
180 1 5 9 20
Note: Blank spaces denote option not offered or not traded.
Janet Barnes joined the firm three months ago after spending one year in Dean Witter's training program in Cleveland. She received a broad training with emphasis in options and futures instruments. Myers though Barnes would be an important member of the firm in its dealings with clients interested in securities options.
The first task that Barnes faced was preparing an analysis of various strategies in the options of Bio-Genetics Corp., a company about which a young dentist in Berea had called. The dentist owned the stock and wanted to explore various strategies to either hedge or enhance his position.
Data provided in Exhibit 1 relate to key information on Bio-Genetics puts and calls. Bio-Genetics stock is currently at 162, pays no dividends, and has a beta of 1.3. The volatility of the stock is estimated at 30 percent. The rate on two-month Treasury bills is 6 percent.
Case Questions:
1. Which options are in-the-money? Which are out-of-the-money? (5 Marks)
2. Compute the margin requirement for a short position in the Apr/140 call option.
(5 Marks)
3. Calculate the commission for the purchase three July/170 puts. (10 Marks)
4. Why are investors willing to pay1 for the Apr/1S0 call and also the Apr/150 put, which is closer to the current market price? (10 Marks)
5. Assume the April options expire in one month. Are the Aprill160 calls fairly valued? Explain. (10 Marks)
6. Assume the client is holding 100 shares of Bio-Genetics common long at 162.
Advise the client on the relative advantages and disadvantages of selling a call against this position using:
(a) Apr/170 versus
(b) July/150 calls (10 Marks)
Financial Risk Management
Assignment – I
Assignment Code: 2015DFM10A1 Last Date of Submission: 15th May 2015
Maximum Marks: 100
Attempt all the questions. All the questions are compulsory and carry equal marks.
Section-A (50 marks)
Q.1. What are the different types of risk influences on investment? Explain systematic and unsystematic risks.
Q.2. a. What is IST? What is its biggest challenge? (10 Marks)
b. What steps has IST followed to meet its biggest challenge? (15 Marks)
SECTION B (50 Marks)
Case Study
The UK Treasurer of A H Corporation expects to receive a payment for wool exports to a customer in Munich in 3 months time. Her marketing department has sold 1000 “ 100 % Wool suits” for a delivered price of 250 Euros each. In the financial times on 10th June she reads the following:
Spot FX Rate 0.850(Euro/Pound)
3 month Forward FX Rate o.853(Euro/Pound
Pound 3 month interest rate
Annualised r=5(9/16) (=0.055625)
Euro 3 month interest rate
Annualised r=7(1/16) (=0.07625)
Questions
a) Explain using the above data how the Treasurer can hedge her receipts in Euros by
i) taking forward cover
ii) taking money market cover
b) What would be the amount of Sterling received if the Treasurer took an uncovered (open) position and the spot rate in 3 months time are as follows:
i) 0.653(Euro/Pound)
ii) 0.658(Euro/Pound)
iii) 0.640(Euro/Pound)
In each case, compare the hedged outcome with the uncovered outcome.
c) Does the set of interest and exchange rates prevailing on 15th June conform with covered interest parity? If not, explain how equilibrium will be established in the relevant markets.
DFM10
Financial Risk Management
Assignment – II
Assignment Code: 2015DFM10A2 Last Date of Submission: 15th May 2015
Maximum Marks: 100
Attempt all the questions. All the questions are compulsory and carry equal marks.
Section-A (50 marks)
Q.1. Explain the development and regulation of derivatives markets in India. Support your answer with examples.
Q.2. How are the prices determined in futures contract? Who are the major players in Future market in India?
SECTION B (50 Marks)
Case Study: Calipso Capital Consultants
Calipso Capital Management (CCC), an investment management firm with offices throughout Ohio, is headquartered in Cincinnati. CCC normally actively manages accounts for high-income individuals with assets of $500,000 or more. Peter Myers, managing director of CCC, thought the increased interest of clients in security op¬tions required more than routine advice because he knew that many clients did not fully appreciate the risks and hedging aspects of buying and selling puts and calls. He had personally spent many hours explaining the vocabulary and technical trad¬ing aspects of option vehicles to clients who found the area exciting but nonethe-less arcane.
EXHIBIT 1
Bio-Genetics Corp. Option Quotes
STOCK PRICE: 162
CALLS PUTS
STRIKE
PRICE APR JULY OCT APR JULY
140 23
150 16 21 25 1 4
160 9 14 20 3 7
170 3 9 13 9 10
180 1 5 9 20
Note: Blank spaces denote option not offered or not traded.
Janet Barnes joined the firm three months ago after spending one year in Dean Witter's training program in Cleveland. She received a broad training with emphasis in options and futures instruments. Myers though Barnes would be an important member of the firm in its dealings with clients interested in securities options.
The first task that Barnes faced was preparing an analysis of various strategies in the options of Bio-Genetics Corp., a company about which a young dentist in Berea had called. The dentist owned the stock and wanted to explore various strategies to either hedge or enhance his position.
Data provided in Exhibit 1 relate to key information on Bio-Genetics puts and calls. Bio-Genetics stock is currently at 162, pays no dividends, and has a beta of 1.3. The volatility of the stock is estimated at 30 percent. The rate on two-month Treasury bills is 6 percent.
Case Questions:
1. Which options are in-the-money? Which are out-of-the-money? (5 Marks)
2. Compute the margin requirement for a short position in the Apr/140 call option.
(5 Marks)
3. Calculate the commission for the purchase three July/170 puts. (10 Marks)
4. Why are investors willing to pay1 for the Apr/1S0 call and also the Apr/150 put, which is closer to the current market price? (10 Marks)
5. Assume the April options expire in one month. Are the Aprill160 calls fairly valued? Explain. (10 Marks)
6. Assume the client is holding 100 shares of Bio-Genetics common long at 162.
Advise the client on the relative advantages and disadvantages of selling a call against this position using:
(a) Apr/170 versus
(b) July/150 calls (10 Marks)
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