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Fnce 423: Futures And Options Question Paper

Fnce 423: Futures And Options

Course:Bachelor Of Commerce

Institution: Kabarak University question papers

Exam Year:2012

KABARAK
UNIVERSITY
SUPPLEMENTARY/SPECIAL EXAMINATIONS
2011/2012 ACADEMIC YEAR
FOR THE DEGREE OF BACHELOR OF COMMERCE
FNCE 423: OPTIONS AND FUTURES MARKETS
DAY: THURSDAY

DATE: 25/10/2012
TIME: 9.00 – 11.00 A.M. STREAM: Y4S2

INSTRUCTIONS:
This paper contains five questions:
1. Question ONE is compulsory
2. Answer any other 3 questions from the rest of the questions
3. Be clear and neat
4. Begin a new question on a new page

TIME ALLOWED 2 HOURS

QUESTION ONE
a)
Differentiate between a call premium and a put premium (4marks)
b)
Explain the factors that would cause an arbitrage opportunity to disappear from a market
(5 marks)
c)
What are the weaknesses of the Black-Scholes option pricing model (6 marks)
d)
Jookay Ltd is currently valued at $250. It has an outstanding debt of $ 100 with a maturity of
5 years. The volatility (standard deviation) of Jookay share return is 60 percent. The risk-free
rate is 10%.
Required:
Using B-S model, calculate the market value of Jookay’s equity and the current market value of
its debt (10 marks)
Note:
C0 = S0N(d1) – Ee-rt N(d2)
Where :
d1 = {In (S/E) + (r +½d2)t}/v d2t
d2 = d1 - v d2t
And
P0 = C0 – S0 + Ee-rt

QUESTION TWO

a) Discuss why an investor may opt for forward contracts rather than futures contracts

(6 marks)

b) With relevant examples, differentiate between commodity derivatives and financial derivatives

(4 marks)

c) Show how traders would react if an arbitrage opportunity existed in a market and explain the factors
that would cause such opportunities to disappear

(5 marks)
QUESTION THREE

a) Explain the reasons behind the significant growth in international futures markets

(6 marks)
b) With relevant examples, differentiate between Interest rate futures and currency futures

(9 marks)

QUESTION FOUR

a. State why commercial banks, investment banks, mortgage companies and other investors
use interest rate swaps.

(6 marks)
b. Discuss the risks involved in the trading of currency swaps.
(9 marks)

QUESTION FIVE
a) “Forwards are zero sum games”. Explain the meaning of this statement in the trading of
derivatives (5 marks)
b) Bwana Investor (BI), an upcoming investor, is considering an option on a share that is currently
selling at $ 35. Knowing about options, he has chosen to buy a put option on this share with an
exercise price of $ 35 and a premium of $3.

Required
(i)
Calculate BI’s breakeven point on this option investment? (2 marks)
(ii)
If at expiration the stock price is $ 40, what is BI’s percentage return on this investment
(2½ marks)
(iii)
Show BI’s total profits/losses in this investment if perspective stock is selling for $ 42 at the
expiration date (3 marks)
(iv)
What is the percentage return on the option investment if perspective stock is selling for $30
at the expiration date (2½ marks)

Fnce 423: Futures And Options Question Paper

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