Birla Institute of Technology & Science, Pilani

Work-Integrated Learning Programmes Division

First Semester 2018-2019
Comprehensive Examination (EC-3 Regular)

Course No. : FIN ZG512

Course Title : Global Financial Markets and Products
Nature of Exam : Open Book
Weightage : 45%
No. of Pages = 2
Duration : 3 Hours
No. of Questions = 7
Date of Exam : 24/11/2018 (FN)
Note:
1. Please follow all the Instructions to Candidates given on the cover page of the answer book.
2. All parts of a question should be answered consecutively. Each answer should start from a fresh page.
3. Assumptions made if any, should be stated clearly at the beginning of your answer.

Q.1 (a) Compare and contrast Market order Vs. Limit order? [3]
Q.1 (b) Mr. Krishna Kumar works as a Senior Engineer at a leading American Multinational company
that manufactures Electronic components based out of Bangalore. He is an avid investor and
had purchased 1000 shares of Reliance at Rs. 500 per share about five years back. Mr. Krishna
Kumar's son will be starting college soon and so he is considering to sell Reliance stock to pay
for his son's college fees. The stock has done reasonably well and had closed yesterday at
around Rs. 1,100 per share. However, the markets have been choppy in the recent past and
Reliance stock had been trading in the range of Rs. 900 to Rs. 1,300 in the last 3 months. Mr.
Krishna Kumar would like to sell his stock at the earliest but is unwilling to accept a loss of
more than Rs. 100 per share on yesterday's closing price. What type of order should Mr.
Krishna Kumar place? [2]

Q.2 (a) Some stocks are listed on several exchanges around the world. Consider for example Wipro,
whose stock is listed in India on the NSE and was trading at Rs. 332 per share on October 31
2018. Its stock is also listed on NASDAQ stock exchange in the form of ADRs and it was
trading at US$ 5.16 per share around the same time. Why might Wipro want its stock to be
listed in India and the United States? Outline at least 3 distinct and compelling reasons for this
phenomenon. [3]
Q.2 (b) Mr. Raghu Rao, an analyst with Citibank in New York, is analyzing General Motors
Company stock. He has estimated that the Company will pay dividends of $1.10, $1.20,
$1.50, and $2.05, respectively, over the next four years. He also expects that the stock can be
sold at a price of $45 per share at the
end of the four-year holding period. If Citibank requires a 15% return on the
shares, how much should Mr. Rao be willing to pay for General Motors stock? [3]

Q.3. An Analyst gathered the following stock market data for three stocks that make up both a Market
Value weighted index as well as a Price weighted index.

December 31, 2016 December 31, 2017

Stock Price Shares Out. Price Shares Outstanding
Intel $48 15,000 $54 15,000
JP Morgan $108 10,000 $121 10,000
Walmart $102 12,000 $96 12,000

3.1. What is the ending Market Value weighted index as of December 31 2017. Assume the
index comprises only of the above three stocks and that the base index was 100 (as of
December 31 2016). [2]

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3.2. What is the ending Price weighted index as of December 31 2017. Again, assume that the index
comprises only of the above three stocks and that the divisor (of the index) to be equal to the
number of stocks in the index. [2]
3.3. Compare and contrast Market Value Weighted index Vs. Price Weighted index, highlighting the
difference in construction as well as the advantages and disadvantages of each. [3]

Q.4. Mr. Arpit Agrawal shorts 36 futures contracts on Reliance Communications Ltd. that are currently
trading at Rs.55,900.00 each. The initial margin is Rs. 1,500.00 per contract and the maintenance
margin is Rs. 500.00 per contract. The next day, the futures contracts close at Rs. 56,400.00 each.
(a) Compute the margin balance in the account (at close of next day)? [2]
(b) Does Mr. Agrawal need to post a variation margin (close of next day)? Why or why not?
Please explain succinctly in a few sentences. [2]
(c) Compare and Contrast Forwards vs. Futures. [3]

Q.5. Mr. Renganathan is a stock analyst at Goldman Sachs, Chicago. He is planning to implement a
covered call strategy using Cisco stock and options. The stock is currently trading at $45.00/share.
January call options, with a strike price of $48.00, on Cisco stock are trading at $2.00. Assuming
Mr. Renganathan goes ahead and implements the covered call strategy using Cisco stock and
options, answer the following questions:

(a) What is the maximum gain for Mr. Renganathan’s strategy? [1]
(b) What is the maximum loss for Mr. Renganathan’s strategy? [1]
(c) Compute the breakeven point for Mr. Renganathan’s strategy? [1]
(d) Draw the Payoff diagram and Profit and Loss diagram for this strategy? [4]

Q.6. European put and call options on Proctor and Gamble (P&G) with an exercise price of $85 and
expiring in 90 days are trading on the Chicago Board of Options Exchange. P&G stock is
currently priced at $90 and will not make any dividend or cash payments during the life of the
option. We are given that the risk free rate is 4.0% and that the above put option on P&G stock is
priced at $1.20.
(a) Determine the fair price for the call option using the above data? [2]
(b) If the market price for the call option (on P&G) is actually at $7.80, should we buy the option?
Why or why not? Explain succinctly in a few sentences. [2]
(c) Name and explain in brief the six factors that influence option prices? [3]

Q.7 (a) Compare and Contrast Interest Rate Swap Vs. Currency Swap? [2]
Q.7 (b) Compare and Contrast Direct Quote Vs. Indirect Quote in Foreign Currency markets? [2]
Q.7 (c) What are Mortgage backed securities? Explain succinctly in a few sentences highlighting the
key features of MBS. [2]

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