BIRLA INSTITUTE OF TECHNOLOGYA AND SCIENCE, PILANI

First Semester 2015-16

Comprehensive Examination Part A
Course No.: ECON F354 and FIN F311 Course Title: Derivatives & Risk Management
Maximum Marks: 20 Duration: 90 min Date: 05.12.2015
ID No: Name: ..

1. An investment bank has the following portfolio-A of OTC options with the same underlying.

Option Position (no. of options held, Delta Gamma Vega

long or short)

Call -1000 0.50 2.2 1.8

Call -500 0.80 0.6 0.2
Put -2000 -0.40 1.3 0.7
Call -500 0.70 1.8 1.4

A traded option Z is available with delta = 0.6, gamma = 1.5 and Vega = 0.8. A traded option Y is
also available with delta of 0.1, gamma of 0.5 and Vega of 0.6.
(a) Calculate the delta, gamma and Vega of portfolio-A.

(b) What position in Z, underlying asset and portfolio-A would make the overall portfolio both
gamma and delta neutral?
(c) What position in Z, underlying asset and portfolio-A would make the overall portfolio both Vega
and delta neutral?

(d) What position in Z, underlying asset and Y together with portfolio-A would make the overall
portfolio gamma, Vega and delta neutral? (1.5 X4=6Marks)
2. Out of three types of option ( ITM, ATM &OTM) which options would you like to write if you
are sure that the current price of underlying stock will remain same at expiry and why?

(2 Marks)

3. Zero coupon bond prices (FV-100) are given as under:

B(0,1)=90.91 B(0,2)=75.61 B(0,3)=57.87 B(0,4)=40.96

Find the swap term structure. ( 4Marks)
4. J &L, Inc. stock has a current market price of $55 a share. The one-year call on J&L stock with a
strike price of $55 is priced at $2.50 while the one-year put with a strike price of $55 is priced at
$1. What is the risk-free rate of return? ( 4Marks)

5. Mr. John wants to lock his fund for five years but he is not interested to get intermittent cash
flows for two reasons- one he is quite busy person and second he does not want to carry
reinvestment risk. Unfortunately, he could find only coupon carrying bonds in the market. He
chooses a 10% coupon (payable p.a.) bond with 5 years maturity and with yield of 8% p.a. and
another with 5% coupon (payable p.a.) bond with 5 years maturity and with yield of 10% p.a.
How can he construct a five year zero coupon bond with these bonds to meet his requirements?
What will be effective yield of synthetic? (4Marks)