DR.

SANTOSH RAI INSTITUTE

196, Zonal Market Soctor- 10, Bhitlal, Ph.0788-4012438
"We aim above the mark to hit the mark."

DERIVATIVES PROBLEM
Prob.1. Consider a three month maturity forward contract on a non-divldend paying stock. The stock Is
available for Rs.200 with compounded continuously rlsk-free of Interest (CCRRI) of 10% p.a. what
would be the price of forward contract?

Prob.2. Consider a 4 month forward contract on 500 shares wlth each share priced at Rs.75. dividend @
Rs.2.50 per share Is expected to accrue to the sharas in a perlod of 3 months. The CCRRI is 10% p.a.
Calculate the value of the forward contract.

Prob,3. Consider the following:

Current value of Index
Dividend Yeild
1400 dioidnmeduga
6%
CCRRI 10%
Find the value of a 3 month forward contract.

Prob.4 The market price of equity shares of KT Ltd. is Rs.40. it has not paying any dividend. The risk free
rate for the investor is 59% The 3 months forward rate for the share is Rs42. should the investor
enter into the 3 months future contract?

Prob.5. The debentures of KT. Ltd. are currently selling at Rs.930 per debenture. The 4 month futures
contract on this debenture is available at Rs945, there is no interest due during this 4 months
period. Should the investor buy this future if the risk free rate of interest is 6%6?

Prob.6. The shares of KT Ltd. are being traded at Rs.250 on the BSE. Its future for 1 months and 3 months
are also available on the BSE. If the risk free rate is 12% p.a. and no dividends aré expected during
this period what should be equilibrium price of these futures?

Pcob.7. The current market price of KT Ltd. share is Rs.140 and Is expects to declare dividend of Rs.10 after
A0 days, what should be the price oftwomonths furures if the risk free rate is 156?

Prob.8 The following data relates to KT Ltd's share prices:

Current price per share 180
Price per share in the future market-6 months Rs.195
It is possible to borrow money in the market for securities transactions at the rate of 12% per
annum.

Required:
1. Calculate the theoretical minimum price ofa 6 month -forward contract.
2. Explin if any arbitraging opportunities exist.

Preb.9. KT Ltd. a non-dividend paying stock, is today selling at Rs.72. you wish to enter into a futures
contract on this stock maturing In 6 months time. if the risk free rate of return is 12% per annum
continuosly compounded what would the fulures price to be? If the price of futures contract is
Rs.75. what action would you take? In case it is priced at Rs.77 will your decision change?

Prob10. KT buys a sensex futures at 5500 in market lot of 200 futures On the setlement date the sensex is
5600. Find out his profit or loss for one lot of future, What would be his position, if the sensex is
5450 on the settelement date?

Proba1. KT buys a NIFTY futures contract for Rs.2,80,0o0o lot size z00 futures). On settlement date the
NIFTY closes at 1,378. Find out his profit or loss ifheRs.1,000 brokerage. What would be position if
hee has sold the future contract?

CA Ketan Thakkar (India Rank Holder Paae 1

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 "We aim above the mark to hit the mark."

Prob.12. Tbuys 500 shares of KT Ltd. Rs.210 per share in the cash market in order to hedge he sells 300
futures of KT. Ltd. Rs.195 each next day the share price and futures decline by 5% and 3%
respectively. lHe close is positions next day by counter transactions. Find out his profit or loss.

Prob.13 The market lot of NIFTY futures is 200 and the two months NIFTY futures are available at 170
our tne
investor creates a long positions and buys 5 lots. On the settlement the NIFTY Is 1760. Find
profit or loss of the investor.
KT buys 10,000 shares of KT at Rs.22 and obtains a complete hedge of shorting 400 Niies at
Prob.14. Rs.1,100 each. He closes out his position at the closing price of the next day at which point the a
of KT Ltd. has dropped 2% and the NIFTY future has dropped 1.5%. yhat is the overall protityi0>
of this set of transaction?
An investor buys a call option with an exercise of Rs.100 for Rs.10 what is the maximum loss that ne
Prob15. could incur? What is the maximum profit, which could accrue to him? Determine break evenstocK
BEP
price. What is the maximum position for the call write?
loss
Prob.16. An investor buys a put option with an exerciseprices of Rs.200 for Rs.15. what is the maximum
break
that he could incur? What is the maxlmum profit which could accure to him? Also determine
even stock price? What is the position for the put writer?

of the
Prob.17.The share of KT Ltd. is selling for Rs.104 KT buys option
a premiym RsS.
3-months call at a
or
price is Rs.105. what is KT pay-off of if the share price is Rs.1d0 Rs.105 or Rs,110
or
exercise of the seller of the call option? Kindiy
Rs.120 at time the option is exercised? What is the pay-off
draw the pay-off diagram.
KT hopes that the price of KT Ltd. will fall after three months. Therefore she purchases a put option
Prob.18. is Rs.30 the
on share with a maturity of three months at a premium of Rs.5, the exercise price and
current market price of KT Ltd. share is Rs.28. how
much is profit or loss of KT (the put buyer)
of the option turns out to be Rs.18 or
the put seller if the price of he share at the time of the maturity
Rs.25 or Rs.30 or Rs.40? what is the pay-off the seller of put option?
Pease draw the payoff diagram.
of
of Rs.130 is available at a call option price
Prob19. The September option on KT Ltd. stock at a strike price of
Rs.10. The contract size is 100 shares. The price of
the stock today in 15 june is Rs.140. rang
a

as at the expiry date.

prices beginning from 110 and ending with 160 with intervals of 10 is possible
a. What is the pay off for the call holder on expiration.
b. Draw the pay off graph.
c. What is the call writer's pay offon expiration
d. Draw the pay off table and the pay
off graph.

sold at Rs.210 KT 3 month call option is available for a

Prob.20 The equity shares of KT Ltd. are being for a premium of Rs.5 share. Find
a 3 month put option is available
premium of Rs.6 per share and strike
the call option and put option given that (1) the
out the net pay off of the option holder of Rs.210 Rs90- 22 o
share price on the exercise day is Rs.200 of or
price in both cases is Rs220 and (ii) the
orRs105 230 2 u
the call option and the
Equity shares of KT Ltd. being currently sold for Rs.90 per share. Both
are
Prob.21 available for a strlke price of Rs.97Jat a premium
of Rs.3 per
for a 3 month period are
put option in this share.
An investor wants to create a straddle position
share and Rs.2 per share respectively.
option period if the share price on that day happens
Find off at the expiration of
out his net pay the
to be Rs.90 or Rs.105. Luch n pab
chad ru bry /shot
lorg hmanlo
Paae 2
Rank Holder
CA Ketan Thakkar lndia

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 ge
5% he sel 30
and 3% "We aim above the mark to hit the mark."

p.22. You have set up a straddle position on a company's share. You have bought one 6-month call with
an exerclse price of Rs.Z5 for a premtum of Rs.3 and a 6-month put with same exercise price for a
premium of R2 Assume that after slx months price goes up to Rs.78 or it comes down to Rs.70.
what is your pay off from lt when would the straddle result in loss?

Prob.23. A call option with an exercise price Rs40. Is avallable at a premium of Rs.3. A put with same
maturity and exercise price can be purechased at a promium of Rs.2. if you create a straddle show the
pay-off from it. When would the straddle result in loss?

Prob.24. KT has bought a 3-month call option on KT Ltd's share with an exercise price of Rs.50 at a premium 2 en
of Rs.3 she has also bought a put option on the same share at an(exercise prlceof Rs.40 at a na fo
premlum of Rs.1.50 KT share is currently selling for Rs.45 what will be KT positíon after three
months if the share price turns out to be Rs.50 or Rs.307 Sa olleunt ka
Prob.25. A call option with an exercise price of Rs.100 can be bought at a premium of Rs.3. A put with an
exercise price of Rs.95 is available at a premium of Rs.5. how can you combine these option to form
a
portfolio? What will beyour payoff at expiration?
Prob.26. A one year call option with an exercise price of Rs.60 is available at premium of Rs.6. you can also
buy a one year put with an exercise price ofRs.55at a premium of Rs.3, if you set upa portfolio of a
put and a call what, will be your pay off if the share price after oneyear is (a) Rs.58 (b) Rs,45 ()
Rs.757
BEP (t) Casd option ptron
Prob.27/ In respect off a particular share a call option with a strike price of Rs.50 is available for Rs.2. on the
same share a put option with a strike price of Rs.45 is available for R explain how a strangle can
be create and what is the pay off profile of that strategy.
Prob.28. You are given three call-optiom on a stock at exercise price (.) of Rs.40, Rs.45 and Rs50 with
expiration date in three months and the premium of Rs.4, Rs.2 and Rs.1 respectively. Show how the
Sellerhai fo
( Y2 ) C o s s
options can be used to create butterfly spread. Construct a table with different market price and
show how profit changes with stock prices ranging from Rs.30 to Rs.60 for the butterfly spread.

Prob.29. Mr. KT buysa call with a strike price of Rs40 at R4andanother with a strike price of Rs.28 at Rs.8.
he selltwo calls with a strike price of Rs34 at Rs.5 Name the strategy adopted. Draw the payoff
table and payoff graph. What would be the positionifhe bought 2 mid ranged calls and sold one call
below?
3 Tetsc ice
Prob.30. Call option on a share are available for a period of 3 months of the strike price of Rs.13, Rs.17.50
and Rs.20 for a premium of Rs4, Rs.2 and Re.1 respectively. Explain how an investor can create a
butterly spread. Also find out the profit potentialities for different prices of shares on the
expiration date.

For each of the following cases calculate the profit/loss of different price ranges of the stock. Also
Prob.31.
compute thebreak even price.Draw the pay offtable and the pay off graph.
Exercise price of Premium on Premium on
Type of option Exercise price of
option bought option sold option bought option sold

Call 60 70
Call 80 75
70 65 9 5
Put
Put 50 60 4 |11

Holder) Paae 3
CA Ketan Thakkar (lndia Rank Scanned with CamScanr-
 "We aim above the mark to hit the mark." d a t e
o fthe
would

xpiration

option

An investor has purchased a call option at the strike price of Rs.90. belore u
Prob32. of
o
the
call

of 3: 1. Explain how the terms

efms

call the company split the shares in the ratio

Rs.10

change? price
of
exercise

A put and a call option each have an expiration date 6 months hence and an ex
Prob.33. a n

value
of
the

The interest rate for the 6 month perlod Is 3 percent p.a. the
is
a. If the put has a market price of Rs.2 and share is worth Rs.9 per share what
3/are
what

e p e r
s h a r e ?

call?
i st h e v a l u e

b. If the put has a market price of Rs.1 and the call Rs.4 what is the value of the sna
C If the call has a market of Rs.5 and market price of the share is Rs.12 per share
of the put? the
for Rs.2.
of Rs.25 sold
Prob.34 In June 2011 a sixumonth call on KT Ltd's stack with an exercise price ou
be

stock price was Rs.20. The risk free interest rate was 59% per annum. How much h ppens

willing to pay for a put on KT Ltd's stock with the same maturity and exercise price? What nop
if the actual price is different from what you are willing to pay?

Prob.35 Given the following

Strike price Rs.180
Current prlce of one share Rs.200
Risk free rate of interest = 10% p.a.
1. Calculate the theoretical minimum price of a European calloption expiring after one year.
2. Ifthe price of the call option is Rs.30 then how can an arbitrageur make profit?

Prob.36. Given the following data:

Strike price Rs.400
Current price of one share Rs.370
Time until expiration 6 months
Risk free rate of interest = 5% p.a.

1. Calculate the theoretical minimum price of a European put option.

2. If European put option price is Rs.10 then how can an arbitrageur make profit.

Prob.37. A four month European call option on a dividend paying stock is currently selling for Rs.5. the stock
price is Rs.64 the strike price is Rs.60 and a dividend of Rs.0.80 is expected in one month. The risk
free interest rate is 12% per annum for all maturities. Do you have arbitrage?

Prob.38. The shares of KT Ltd. are currently traded at Rs.20 per share. A call option at strike price of Rs.18 is
available at Rs.3 for an expiration period of 1 year. Analyse the profit profile of the investor if the
risk free rate of interest is 10% and the investor wants to go short in share and long in the cal.
he¢al un pr ce
Find out the lower limitin the followihg cases:
Prob.39
a. 4 months call option with strike price Rs.25 and asset price Rs.28 and r = 8%.
b. 1 month put option with strike price Rs.15 and asset price Rs.12 and r= 6%

Prob.40 KT Ltd. is a listed company and the share prices have been volatile. An investor expects that the
share price may fall from the present level of Rs.1900 and wants to make profit by a suitable option

strategy. Heis shortof share ataprice ofRs.1900andwantsto pratecthimselfagainst anyloss.The

following option rates are available: Pesee kor diye hai ab buy karerje
Strike price Call option Put optlon
Rs.325 | 65
Rs.1,700
200 80
1,800
1,900 8S 120
2.000 70 200
2,100 65 280

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 --- ~-~. -

"We aim above the mark to hit the

markK. put option
ke hum sells ha
koe hume sell kAr ki jaj3a
ne investor decides to buy a call at a strike price of Rs.1,800 and to write a put at a strike price
or
S.2,000. Find out the profit/loss profile of the investor ir the share price on the expiration date is
Rs.1,600 Rs.1,700; Rs.1,800; Rs.1,900; Rs.2,000 or Rs.2,100. Also make the dlagrammatic
presentation.
Prob41. Which position on the index future gives a speculator, a complete hedge against the following
transactions:
a. The market share of Right Limited is going to rise. He has a long position on the cash market o
Rs50lakhs on the Right Limited. The beta of the Right Limited is 1.25
D. The share of wrong Limited is going to depreclate. He has a short positlon on the cash market of

Rs.25 lakhson the wrong limited. The the wrong linited is 0.90
beta of
C. The share of Fair Limited is going to stagnant. He has a short posltion on the cash market of

Rs.20 lakhs of the Fair Ltd. the beta of the Fair Limited is 0.75.

share which is selling at Rs.60. the option has

an
Prob42. A call option due to mature is selling for Rs.on a
exercise price equal to Rs.55, is there an arbitrage opportuníty? If yes, show how it works?

the option has an

Prob43. A put option due to mature is selling at Rs.5 on a share which is selling at Rs.75.
exercise price of Rs.73 is there an arbitrage opportunity? If yes show how it works.

Prob44. Identify the action that is required in each of the following situations:
Stock Beta Stock Position Stock Value Hedge Required
Rs.2L Full
0.8 Long
Rs.5 L Full
1.2 Long
0.9 Short Rs.1 L Full
Short Rs.2 L Full
1.0
Rs.1L 50%
1.0 Long
| 1.3 Short Rs.1 L 110%
A portfolio manager has the following five stocks in his portfolio
Prob45. | Beta
Security No. of shares Price/share
10000 50 1.2

5000 20 2.0

8000 25 0.7
1000 100 1.0
200 1.3
E 500
a. Compute portfolio beta
he will sell? What will be the
b. If the manager wants to reduce the beta to 0.8 how much,should
new portfolio?
hisk free inyesment ehowdd
no
he bi
beta iwhat wilbethenew portioli
If the manager wants to increase the
to
C.
obtain
and futuresyhave a éantraáctmultiplier of200, how can he
d. Suppose NIFTY is 1200 points
the same position as in (b) by dealing in NIHTYKytures? Huture
(ontrect always aki in
as in Cby dealing in NIFTY futures?
Lol
e. How can he obtain the same position

Prob46. Put call Parity

put are available on KT Ltd'satock.
The exercise price is Rs.100.
Three month call and three month
the CCRFI is 12% p.a.
the share are worth is Rs.95 find the value of the call.
1. If the put rules at Rs.5 and
2. If the put rules at Rs.3 and
the call are worth is Rs.4 find the value of the share.
3. Ifthe call rules at Rs.8 and the share is worth Rs.102, find the value ofthe put

Paae 5
CA Ketan Thakkar (India Rank Holder
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 "We aim above the mark to hit the mark."

Prob.47. KT Ltd.
quotes at Rs. 100. The
price in the next slx months may jump to Rs. 115 or fall to Rs.
is the 90.
nat
Use
value ofa six month call
option with an exercise price of Rs. 100 and a CCRFI
of 20%
risk neutral
approach.
Prob.48. Risk Neutral
BLtd's
Approach
stock is priced are Rs. 220. It could ht Rs. 264 or Rs. 198 in one
uropean call year's time. A one year
Approach
option has an exerclse prlco of Rs. 165. What is the value of call? Use rlsk Neutral
do
Prob.49., A share is
currently selling for Rs.
120. Thero are possible
of Rs. 105.
Assume that risk-free of return prices of the share after one year: KS. 134
call option ls 9 percent per annum. What is the value of a one
(Buropean) with an exerclse price of Rs. 12s7 year
Prob.50. A share
price is 40, it is known that
at end of one
interest rate is 8%
per annunm with
month it will be either Rs. 38 or Rs. 42 the risk-free
continuous
European call option with a strike Price of Rs. compounding. Find the value of a one-month
Prob.51. 39 with the help of Binomial Model?
KT Ltd. share Price as on
date is Rs. 200, 6 months
are that the share from now It is
price will be Rs. 178 and 50 expected that 50 percent chances
share. A call option of the percent changes are that the price will be Rs. 214
share can be exercised at per
per share. The risk free interest the end of the
rate is 10% period at exercise prlce of Rs. 205
a. Find out the p.a. (i.e. 5% for 6 months).
perfectly hedged situation
b.
Compute value of holding in terms of through shares and the call option.
C.
Estimate the option hedged position as per above part (a).
premium (option price) at the beginning based on given rate of interest
Prob.52. Multi period Binomial Model:
A stock index is at European Call option
down by
S000 points. There is a 50% probability that it will
or
10 points in each
month. Consider a European call option on this index change either up by 20 points
price of 5020, which will expire in with an exercise
a. Find the value of the three months
b. If the actual
European cal1?
price of the call were Rs.12
what strategy would you adopt?
C. The actual price if the
put
Rs.6 will
all
were strategy change?
Prob.53. Multiperiod Binomial Model: European.PUT
Consider the data in the option
previous Problem.
a. Find the value of the
European put?
b. Ifthe actual
price of the put were Rs.11 what strategy would
The actual price if the put were Rs.18 will you adopt. n
your strategy change?
Prob.54. Binomial Model -Two period Problem-
European PUT option
The current share price is Rs. 50 and share
price volatility has been estimated to be either 20%
or down. The risk free op
interest rate is 5% p.ä. Using
24 months put option with a strike two periad binomial estimate the fair price of
price Rs. 52. of (2wn
Prob.55. Multi period Binomial Model- American
cal
A stock index is at 7000
points. There is a 60% probability that it will go up by 10 points in each
month & 40% to come down by 8 points. Consider an American call option an this index with an
exercise price of 7010
points. Find the value of the American cal. -> 3 months
Prob.56. Multi period Binomial Model- American put
Data as in previous Problem except that it is American put: COmpornAG
Contin
a. Find the value of this put
If the actual price of, the put were Rs. 30 what action would follow?
nal
b.
R i s

C. If the actual price of the put were Rs. 10 will

your strategy change?

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 "We aim above the mark to hit the mark."

Binomial Model - Two period Problem - Call and Put Ewmopia

The current share price is Rs. 100 and share price volatility has been estimated to be either 10% up

or down. The risk free interest rate is 8% p.a.

with strike price of
Using two period binomial, estimate the fair price of two 6 months call and put
a

Rs. 100.

Prob.58. The following data is available for KT Ltd., company that is not expected to pay dividendfor a year
S So E R tThifS) 0.09
60 56 0.14 0.5 0.3
What is the value ofthe calloption as per the Black and Scholes model?
Also find out the value of a put.
call options:
Prob.s9. We have been given the following information about KT company's shares and
Current share price Rs. 165
Option exercise Price Rs. 150
Risk free interest rate 6% (continuous compounded)
Time to option expiry 2 years
Volatility ofshare price (Standard deviation) 15%
Price of Rs. 49) for 200
Prob60. The shares of KT Ltd. are being sold for Rs. 50 per share. A call option (strike
at Rs. 4 per share. the annual risk free rate
of interest is 7%. The standard
days is available
out the value of the option. Use
deviation of the return of the share may be considered as 0.3. find
Black and Scholes model, given that expiry period of call option is 200 days.
The following data is available for A. S. Limited, a company that is not expected to pay dividend for a
Prob.6.
year
SO R 0.4
120 110 0.14
What is the value of the call option as per tlhe Black and Scholes model?
Also find out the value of a put.
The equity share of KT Ltd. is present selling at Rs, 50. A call option with a period of 4 months and
Prob.62 strike price Rs. 45 is available for Rs. 6 per share. is the option correctly priced if () a dividend of
Rs. 2 expectedin2 months time. (i) the variance in log of share price is 0.06. and (ii) the risk free
rate of interest is 3%.

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