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FRM Practice Questions

1. A share ‘X’ is currently selling at Rs. 75. The risk free rate of interest is
Rs.9% per annum. What should be the fair contract price of a 2 month
futuress contract?
2. A share ‘Y’ is available at Rs.100. The risk free rate of interest if 8.5%
compounded continuously. The share is expected to yield a dividend of
Rs.2.50 in 1 month from now. Determine the value of a 3 month
futuress contract if one contract involves 2000 shares.
3. Consider a 10 month forward contract on a stock with a price of $50.
We assume that the risk free rate of interest continuously compounded
is 8% per annum. We also assume that dividends of $0.75 per share are
expected after 3 months, 6 months and 9 months. Calculate the
forward price.
4. A 1 year long forward contract on a non-dividend paying stock is
entered into when the stock price is Rs.40 & the risk free rate of
interest rate is 10% per annum with continuously compounding.
i. What are the forward price &the initial value of the forward
contract?
ii. What will be the forward price 6 months later, if the price of the
stock is Rs.45 & the risk free interest is still 10%?
5. The company ‘B’ rated ‘BBB’ by standard & Poor’s has the opportunity
to borrow either at a fixed rate of 8% or at a floating rate of LIBOR+75
basis points. ‘A’ corporation which is rated ‘AAA’ by standard & Poor’s,
it can borrow either in long term fixed coupon debt market at 7% or at
a floating rate of LIBOR+25 basis points.
i. You are required to arrange a swap between them so as to lower
their cost of borrowing.
ii. Is the swap is contracted with swap dealers & the swap dealer
charges 6 basis points per year, show the benefit of the swap to
both the parties.
6. Company ‘A’ &’B’ have been offered the following rates per annum on
Rs.100 million loan for 7 years. Company A requires a floating rate loan
& B requires fixed rate loan.
Fixed rate Floating rate
Company A 7% LIBOR+25 basis points
Company B 8% LIBOR+75 basis points
i.Design a swap that will appear equally attractive to both companies.
How swaps lower the borrowing costs for both companies.
ii.Design a swap that will net a swap dealer, acting as intermediaries
earn a profit of 6 basis points that will appear equally attractive to
both companies.
7. From the following data, calculate the values of call & put options by
using B & S model. The current price of the share is Rs.125.94, Exercise
price is Rs.125. Time to expiry is 35 days. Standard deviation is 0.83 &
continuously compounded rate of return is 4.56% per annum. There are
no dividends on the stock.
8. An investor wants to earn by writing a call option. The current price of
the stock is Rs.28 & he wants to write a 4 months call option with the
strike price of Rs.30. The investor wants to determine the appropriate
premium to charge for the call option. The stocks standard deviation is
assumed to be 30%. The risk free rate interest rate is assumed to be
10%. Determine the call option premium.
9. A stock is currently selling for 58.875. The risk less interest rate is 8%
per year. Estimate the value of a call option using B&S model with a
strike price of 60 & the time to expiration of 3 months. The standard
deviation of the stocks annual returns is 0.22. Also calculate the put
option price using put-call parity.
10. The current price of a share is Rs.50. It is believed at the end of one
month the price will be (55/-) / (45/-). What will a European call option
with an exercise price of 53/- be valued? The risk free rate of interest is
15% per annum continuously compounded. Calculate the hedge ratio
also.
11. Share ‘X’ is currently available ay Rs. 100. The risk fee rate of interest is
8% per annum compounded continuously. What should be the ideal
contract price of one month futures contract?
12. A forward contract on 200 shares, currently trading at Rs.112 per share,
is due on 45 days, if the annual risk free rate of interest is 9% calculate
the value of the contract price. How would the value be changed if a
dividend of Rs.4 per share is expected to be paid in 25 days before due
date.
13. A certain share index provides a dividend yield of 3.5% per annum. The
current value of the index is 1003. The continuously compounded risk
free rate of return is 8%.
i. Find the value of a one month futures contract on the given
index per unit
ii. Find the value of a one month futures contract on the given
index assuming that each contract has 200 units.
14. A share is currently available at Rs.100. The risk free rate of interest is
9% per annum compounded quarterly. What should be the fair price of
a 45 days futures contract?
15. Using the data given below obtain the value of a futures contract to an
index:
Spot value of index= 1216
Risk free rate of return= 7% p.a.
Time to expiration= 146 days
Contract multiplier= 200
16. A stock index is currently at 820. The continuously compounded risk
free rate of return is 9% p.a. & the dividend yield on the index is 3% p.a.
What should the futures price for a contract with 3 months to
expiration be?
17. The current spot price of a 100rupee share is 802.60. Obtain the fare
price of December futures contract on this share assuming the risk free
rate return to be 9% & the market lot size as 250. The maturity fate is
73 days from today. How would the value of the contract be affected if
a dividend of 8% is expected in 30 days time?
18. The risk free rate of interest is 6% p.a. with continuous compounding,
and the dividend yield n a stock index is 3.2% p.a. The current value of
index is Rs. 4,400. What is the 6 months futures price?
19. The 2 month interest rate in Switzerland & India are, respectively 3% &
6% p.a. with continuous compounding. The spot price of the Swizz franc
is Rs. 33,778 & the 2onth forward rate is Rs. 33,924. What arbitrage
opportunities does this create?