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Post Graduate Diploma in Management (2019-21)
END TERM EXAMINATION: TRIMESTER III
Course Name: FN 505 – Financial Markets and Instruments
Time: 2.5 Hours Maximum Marks: 40
Instructions: Closed Book
1. Refer to the following figure:
Explain how an arbitrageur can gain from the above quotes of INR and USD. [5] 2. How are currency futures different from forward agreements? Refer to the figure in Q1 for JPY- INR. The rate of interest in Japan is 2% and that in India is 6%, what will be the implied futures rate if you want to purchase yen today? [5] 3. What are the various steps involved in stock trading in India? Explain each of them in detail. [5] 4. What are circuit breakers? How are they useful to an investor? What are the filters proposed by the NSE? [2+3+3]
5. Read the following news published in The Mint, dated February 20, 2020: A fall in global crude oil prices following China demand concerns, largely because of the coronavirus outbreak, may help India contain its current account deficit but will lead to inventory losses and lower margins for domestic oil marketing companies - Indian Oil Corp Ltd, Bharat Petroleum Corp Ltd and Hindustan Petroleum Corp Ltd.
The virus outbreak in China has hit demand for crude oil and petroleum products, with the International Energy Agency (IEA) and the Organisation of the Petroleum Exporting Countries (Opec) trimming demand forecasts. This has led to a fall in global crude oil prices. "If crude oil prices continue to decline till March, then we will have a huge inventory loss, which will suppress our margins. Because crude prices at which we have had these products as of December is around $68 per barrel. Today crude oil is at $54 per barrel, a steep fall," said director finance from an oil marketing company. Crude oil prices have fallen by around 10% in the last one month. Currently, it is at $59.20 per barrel. Refining firms in China have been forced to reduce output and cancel contracts as quarantines and flight cancellations have hurt demand and distressed cargoes are now being offered to large consumers like India. "In the downstream sector, lower oil prices are expected to lead to inventory losses in the short term even as under-recoveries on sensitive products are likely to decline," said ICRA Ltd in a note on 18 February. "This kind of fall in crude oil prices has been unprecedented. We would prefer crude prices to hover around $65 per barrel. That is our comfort level," a senior official from an oil marketing company said. ICRA added that realisations of Indian upstream companies on crude sales would decline due to lower oil prices, severely impacting the profitability of the sector. "Though the OPEC+ is already considering deeper production cuts, nevertheless if lower crude oil prices sustain, the capex programs of private companies could be impacted," ICRA said. Though low product prices have the potential to invigorate demand, the same is expected to be outweighed by the demand slowdown. Accordingly, with gross refining margins (GRM) at low levels, global demand slowdown is expected to exacerbate crack spreads leading to more pressure on the GRMs, which would be offset partially by lower fuel and losses.
Evaluate the above news and identify whether the situation is a contango or backwardation. Explain your position. What is/ are the difference/ differences between a contango and backwardation? [4+1] 6. Explain the following: (i) Long and Short Hedge with an example (ii) Book Building Process and the types companies which can offer IPOs through this route (iii) Conditions for issuing a rights share [3+3+3] 7. What are the advantages and disadvantages of EPF, PPF, Rajiv Gandhi Equity Scheme? [3]
