Financial Risk Management — DU B.A. (Hons.) Business Economics (BBE) Previous Year Question Papers

Sl. No. ofQ. Paper : 7536 I Mardmum Marks.. 90 (c) The answers should be short and to the point. Use of simple cat.culator is allowed, Log and 'e' , MORTALITY table permitted (e) If any assumption is made while solving a problem, the same must be stated clearly and mentioned in the paper that the same was required to solve the problem 1. What is Delta Neutrality in option pricing. Is the concept same as Delta Hedging. Explain. (a) Also zissume a current portfolio i§ delta neutral with gamma of -1,800. You want to buy a new option whose delta is 1.0 and gamma is 0.36. Make the new portfolio delta-gamma neutral. What would be your final strategsr for achieving this portfolio. (b) A shopkeeper comes to a bank with a proposal to fund his project: Initial Outlay/ Investment: 1,00,000, Cash Flows: Rs. 40,000 p.a. for four years, Project Life 4 years, Market Discount rate/,Borrowing Rate 15%. The banker makes its own assessment and finds that such a project cannot be accepted as cost of project could escalate by loo/o while cash flows might come down by 8% in case of adverse conditions. Shopkeeper on the other hand feels otherwise. Give your viewpoint, whether or not the banker should accept this project for funding keeping into considerations its own assessment and shopkeepers request. Show with calculations along with safety margin of two parameters where bank has expressed its concern. (c) A Company has total assets of 1.7 crores, with annual Sales being 68 1akhs and an EBIT of 27 1akhs. The latest balarice sheet shows Company's Market Capitalization as 1.8 crores with total debt obligatioris standing high at 0.5 crores. Company retains 35% of its earnings arid maintains a Working Capital of 211akhs. Using Altman 'Z' Score, show whether the Company likely to default(all figures except retained earnings are in INR) 2. (a) The ruling price of the stock is Rs.120 and the option on that stock be available at a price of Rs.110, expiring in an year's time. Risk Free rate is 8% p.a. It is assumed that the share can take only two values .on the expiry of thei option i.e. Rs 160 or Rs 50. You have to find out the option premium considering each of the following strategies; one at a time. (i) 'x' shares buy and I call option seu and (ii) 'x' shares buy and I put option sell (b) Write down the ''basic formula" for computation of premium under a call option using Black Scholes Options Model clearly explaining each of the components used in the formula (c) Mr A has `a portfolio of 1000 shares of a stock which is presently priced @ Rs. 40 per share. He is worried that in case of any crisis or war like situation, the Portfolio value might fall resulting in huge loss, however his risk tolerance limit is 15%. Ignoring Premium, build his portfolio so that he is able to limit the risk which must not be more than 15% (in both directions) in any situation. You are also given additional information, Put Option