Hedging Financial Products: Futures, Options and Swaps — DU B.Com. (Hons.) Previous Year Question Papers

1. Discuss the functions of derivatives. How was derivatives trading introduced in India? Discuss the role of the J.R. Varma Committee in the development of the derivatives market in India. Describe the recent developments in the Indian derivatives market. (18) 2. Discuss the meaning and features of the options contracts. Differentiate between American-style and European-style options. Differentiate between call options and put options. An investor holds 200 shares of XYZ Ltd, currently trading at 7150 per share. To hedge against a possible fall in the share price over the next month, the investor purchases a put option on XYZ Ltd with a strike price of 7140 and a one-month maturity. The premium paid for the put option is 74 per share. Calculate: (i) What will be the total payoff of the investor if the share price of XYZ Ltd at expiration is (ii) What will be the total payoff of the investor if the share price of XYZ Ltd at expiration is 3. What is the cost-of-carry model in futures pricing? Explain its significance. How does it differ from the Expectancy model? A firm has borrowed funds at a floating interest rate linked to 1-year MIBOR and is concerned about a possible rise in interest rates. To manage this risk, the firm enters into a plain vanilla interest rate swap. Please explain how the interest rate swap helps the firm hedge its interest rate exposure. Illustrate your answer with a simple numerical example showing the fixed payment, floating receipt, and net settlement. (18) Discuss the prerequisites for trading in the derivatives market in India. Describe the major risks in derivatives trading. Write a note on an arbitrage opportunity in the futures market. The current spot price of copper is 7820 per kg. A 6-month futures contract on copper is quoted at 7880 per kg. Market analysts expect the spot price after 6 months to be 7840 per kg. Based on the Expectancy Model of futures pricing, answer the following : (1) Compare the futures price with the expected future spot price. State whether the futures contract is overpriced or under-priced. (11) Suggest an appropriate trading strategy for an investor. (18) 5. Write short notes on any three of the following: (1) Difference between exchange-traded and over-the-counter derivatives (i) Role of Clearing Corporations (iii) Mechanics of Standard Portfolio Risk Analysis (iv) Currency Derivatives