Description

Financial Derivatives

Dec 2025 Examination

 

 

Q1. Rohan is an investor interested in Global Tech Ltd., which is currently trading at Rs.1,800 per share. He is considering two options contracts:

A call option with a strike price of Rs.1,750 and a premium of Rs.120 per share. A put option with a strike price of Rs.1,850 and a premium of Rs.100 per share. Calculate the intrinsic value, time value, and profit or loss for both the call and put options if the stock price rises to Rs.1,900 at expiry and if the stock price remains at Rs.1,800 at expiry

Also comment what should be the minimum stock price at expiry at which Rohan will make a profit on the call option, and the maximum stock price at expiry at which he will make a profit on the put option. (10 Marks)

Ans 1.

Introduction

Financial derivatives are powerful tools in modern capital markets that allow investors to manage risk, speculate on price movements, and take positions with limited capital outlay. Among these instruments, options are widely used because they provide flexibility through rights without obligations. A call option gives the holder the right to buy an asset at a fixed price, whereas a put option gives the right to sell an asset at a fixed price. In the given case, Rohan is evaluating two options contracts on Global Tech Ltd. – a call with a strike of 1,750 and a premium of 120, and a put with a strike of 1,850 and a premium of 100. To assess his investment outcome, it is essential to calculate the intrinsic value, time value, and profit or loss

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Q2(A). Priya, an investor, buys 50 futures contracts of ABC Ltd. at a futures price of Rs.2,000 per share, with each contract representing 10 shares. The exchange requires daily mark-to-market (MTM) settlement. Over the next three days, the closing futures prices are Rs.2,020 on Day 1, Rs.2,010 on Day 2, and Rs.1,990 on Day 3. Calculate Priya’s daily profit or loss based on the change in futures prices each day. Also determine the total net gain or loss for Priya after the three days of MTM settlement. (5 Marks)

Ans 2a.

Introduction

Futures with daily mark-to-market (MTM) convert each day’s price change into immediate cash gains or losses, keeping margin accounts current and credit risk low. Priya buys 50 futures contracts of ABC Ltd. at a futures price of 2,000 per share, and each contract represents 10 shares, so her total exposure is 500 shares. We will compute her day-wise profit or loss strictly from the change in settlement prices and then sum these MTM flows to find the

 

 

Q2(B). ABC Ltd., an Indian exporter, is expecting to receive USD 100,000 from a client in the United States in three months. The current exchange rate is Rs.82/USD, but the company is concerned that the rupee may strengthen by the time the payment is received, reducing the rupee value of the payment. Explain how ABC Ltd. can use a forward contract to hedge against this exchange rate risk. (5 Marks)

Ans 2b.

Introduction

Exchange rate fluctuations can significantly affect exporters’ earnings. For ABC Ltd., which expects to receive USD 100,000 in three months, the risk lies in the possibility of the rupee appreciating against the dollar, thereby reducing the value of its dollar receivables when converted into rupees. At the current spot rate of Rs.82 per USD, the inflow seems attractive, but the uncertainty of future exchange movements creates exposure. To mitigate this, ABC