CDM University questions

A. True or false (any 8) (8 marks)

November 2018

1. It is very difficult to take long or short position in the

derivative compared to other assets. False (one can plan
and take either a short or a long position depending on
the purpose selling or bying)

2. Forwards are over the counter instrument. true

3. Expiration day is the last trading day of the contract. true

4. The spot price is the future market price of the underlying

asset. True (spot price + carrying cost = future price)

5. Contract price = (price of each security x contract)/lot

size. (true)

6. Payoff on a position is likely profit/loss that would accrue

to a market participant with change in the price of the
underlying asset at expiry. (true)

7. Speculators take large, calculated risk as they trade based

on anticipated future price movements. (true)

8. In options, execution of contract can be done any time

before the expiry of the agreed date. (True)

9. An option premium is the income received by a investor

who holds the option contract. (false) (options premium is
received by the seller or writer of the options)

10. The strike price is specified in the option contract and

does not change over time. (false)
B. True or false (any 8) (8 marks)

May, 2019

1. Both parties have specified obligation under derivative

contract. true

2. Futures are traded on OTC. false

3. If the price of the underlying asset moves according to the

speculators expectation they make small profits. false
(speculators make large profits)

4. Index options have index as undertaking (true) (NIFTY,

BSE Sensex, etc)

5. Derivatives are mostly primary market instruments. false

6. Bid price is the price the buyer is willing to pay. true

7. The summation of spot price and future price is basis.

False (spot price – future price = basis. Summation means
addition)

8. Futures are standardized forward contracts traded on

exchange. (true)

9. Advances in financial theories gave rise to derivatives.

true

10 Lot size is the quantity of underlying security. (true)

C. True or false (any 8) (8 marks)

October, 2019

1. A person buying a futures contract is said to hold a short

position. false (buyer long position)

2. Long futures payoffs are directly related to the underlying

asset price. True (future contracts and payoff arising
thereon are related to the price of the underlying asset).

3. Speculation in futures market involves higher risk as

compared to holding same position in spot market. (true)

4. A bearish speculator will enter into a long future contract.

False (bullish speculator will enter as he feels prices will
rise)

5. Premium for an American option will generally be lower as

compared to European option. (false) (American options
can be exercised before or on the expiry date) (European
options can be exercised on expiry date)(premiums are
more on American options)

6. Binomial model of option valuation is much more flexible

as compared to black & scholes model. (true)

7. Cash and carry arbitrage refers to a short position in the

cash or underlying market and a short position in futures
market. False (cash and carry arbitrage is long position of
the buyer. Reverse cash and carry arbitrage is short
position of the seller)

8. The VAR obtained under the historical simulation method

should be the same as that under the delta normal
method. (true)
 9. An option premium is the income received by an investor
who holds the option contract. (false) (income received by
options seller or writer)

10 Derivatives are mostly primary market instruments.

(false) (they are secondary market instruments)

Problems asked in three university papers of November,

2018, May, 2019 and November, 2019 of CDM

Type A - Calculation of fair value of futures (8 or 7

marks)

1. The spot price of gold is Rs 31,000, the locker rent

is Rs 500 and the insurance charges are Rs 750/-.
The interest rate on the borrowed funds is 14% p.a.
compounded on monthly basis. What will be the
fair value of the futures after 3 months ? (Nov,
2018)

2. The spot price of copper is Rs 4,600/- per kg, the

store rent is 6,000 paid semi annually. The interest
on the borrowed funds is 12% p.a. compounded on
monthly basis. What will be the fair value of the
futures after 3 months ?
(Nov, 2018)

3. The spot price of gold is Rs 32,200/-, the locker

rent is Rs 12,000 paid annually and the insurance
charges are Rs 750/-. The interest rate on the
borrowed funds is 12% p.a. compounded on
monthly basis. What will be the fair value of the
futures after 3 months (May, 2019)
4. The spot price of silver is Rs 41,000/-. The locker
rent to be paid semi annually is Rs 9,000/-, the
insurance charges amount to Rs 3,600/-. The
interest rate on the borrowed funds is 10% p.a.
compounded on monthly basis. What will be the
fair value of futures after 3 months ? (May, 2019)

5. The spot price of gold is Rs 39,000/-. The locker

rent is Rs 500/- and insurance charges are Rs
750/-. Interest rate on borrowed funds is 12% p.a.
compounded on monthly basis. What will be the
fair value of 3 months futures contracts ?
(November, 2019).

6. The cost of 1 kg of silver is Rs 65,000/-, the locker

rent is Rs 2,500, the insurance charges are Rs
500/- for a month. Interest on borrowed funds is
12% p.a. which is compounded on monthly basis.
What will be the fair value of 1 months contract ?
(November, 2019).

Type B - Calculation of profit or loss in futures

contract with payoff diagram (8 or 7 marks)

1. An investor takes position in the futures market

through the following transactions

a. Buys 6 contracts of Tata steel Ltd at Rs 3,125 with

a lot size of 200, which expires at a final
settlement of Rs 3,150/-.
b. Sells 7 contracts of canara bank at Rs 675/- with a
lot size of 100 which expires at 665/-.

Determine the net profit or loss for the investor

from both the positions. Draw the payoff diagram
for respective positions (November, 2018)

2. Hari believes that the stock price of Mahindra will

go down. He sells 10 future contracts expiring after
3 months. The lot size of each contract is 500
shares. The short position is taken as the futures
price of Rs 770/- per share.
Calculate the position value.

Find out the possible gain or loss on the position if after 3

months the spot rate moves to a) Rs 760 and b) Rs 780.
(May, 2019)

3. Mr Bhalladeva takes the position in the futures market

through the following transactions

1. Sold Hero motors corp futures for Rs 7,930-. On the expiry

the cash market price was Rs 8,000/-. Find out the profit
or loss for the lot size of 50 shares.

2. Took a long position on 10 contracts of RBL Bank at Rs

960/- and the settlement price was Rs 1,050/-. Calculate
the profit/loss made if the contract size was 300.

Also draw the payoff diagrams for the respective positions.

(November, 2019)
Type C – Construction of options payoff charts
with workings (8 or 7 marks)
1. Naman shorts a call option of VST Ltd at an exercise
price of Rs 1,020 with a premium of Rs 50/-. Calculate
the profit or loss for Naman if the spot price on expiry
is as follows Rs 970, Rs 980, Rs 990, Rs 1,000, Rs
1,010, Rs 1,020, Rs 1,030, Rs 1,040 and Rs 1,050/-.

Also draw the payoff diagram for the same. (November,

2018)
2. Shaman buys a call option of MRF Ltd at an exercise
price of Rs 900/- with a premium of Rs 30/-. Calculate
the profit or loss for shaman if the spot price on expiry
is as follows Rs 860, Rs 870, Rs 880, Rs 890, Rs 900, Rs
910, Rs 920, Rs 930, Rs 940.

Also draw the payoff diagram for the same. (May, 2019)

3. Katappa buya a put option of Bahubali Ltd at a strike

price of Rs 30/- for a premium of Rs 6/-. Calculate the
profit or loss for Katappa if the market price of the
share is Rs 14, Rs 16, Rs 18, Rs 26, Rs 28, Rs 30, Rs 31,
Rs 35, Rs 39.

Also draw the payoff diagram for the future (Nov, 2019)
 Match the following

a. November, 2018

Match the following (Any 7) (10 marks)

Sr Column A Column B
No.

1 No margin requirement a. Unlimited profit

2 Contract size b. Highly risky

3 Settlement of forward c. Lot size

contract

4 Speculation d. Higher option premium

5 Arbitrage e. Cash or delivery

6 Option writer f. Forwards

7 Option holder g. Directly proportional to spot

price

8 Deep in the money h. Short position

9 Future contract i. Operating leverage

10 Financial risk j. Symmetrical payoffs

Nov 2018 answers

Column A Column B

1 f
2 c
3 e
4 b
5 g
6 h
7 a
8 d
9 j
10 i
May 2019

Sr Column A Column B
No.

1 NCDEX a. Used to limit risk in spot

market

2 Underlying asset b. Short future

3 Maintenance margin c. Option premium

4 Valuation of futures d. Commodity based

5 Hedging e. Cost of carry model

6 Bearish security f. Difference between option

premium and intrinsic value

7 Option holder g. Gold, silver

8 Time value of option h. More flexible valuation

9 Put call parity i. To ensure balance in margin

account
10 Binomial model j. European option

May 2019 answers

Column A Column B

1 d
2 g
3 i
4 e
5 a
6 b
7 c
8 f
9 j
10 h
 November, 2019

Match the following (Any 7) (10 marks)

Sr Column A Column B
No.
1 Hedgers a. Measure of the risk of
investment

2 Lot size b. Eliminates the risk

3 Time value of option c. Public private partnership

4 VaR d. Call option

5 Perfect hedge e. Over the counter market

6 Right to buy f. Maturity date

7 Arbitrageurs g. No of assets to be delivered

8 Option expires h. Risk management

9 Forward contract i. Riskless profit

10 ICEX j. Difference between option
premium and intrinsic value

Nov 2019 answers

Column A Column B

1 h
2 g
3 j
4 a
5 b
6 d
7 i
8 f
9 e
10 c
Questions 7 or 8 marks or short notes

Name Questions

Introduction to 1. Define commodity market. Explain its

commodity history and growth in India (Nov 18, Apr,
market 19)

2. What are the leading commodity

exchanges in India and abroad ? (Nov 19)

3. Explain the structure of commodities

market in India ? (Nov 19)

4. Discuss the participants in commodity

market ? (Nov 19)

5. Short notes on MCX (Nov 18, Apr 19)

Introduction to 1. Write note on different types of

derivatives derivatives traded in India (Oct, 18, Apr,
market 19)

2. What is a derivative contract ? what are

its elements ? (Nov 19)

3. Distinguish between forward and futures

(Oct 18, Apr 19)

4. Short notes on types of underlying assets

(Oct 18, Apr 19)

Futures 1. Explain initial margin, settlement price,

contract size (nov 18)

2. Explain future price, open interest (Apr

19)
Futures contd 3. Explain expiry date, market to market
and basis (Nov 19)

4. Short notes on cost of carry model (Oct

18, Apr 19)

5. Backwardation (Oct 18, Apr 19)

6. Contango (April 19)

Hedging 1. Explain cash and carry arbitrage in detail

(Nov 19)

2. Distinguish between speculation and

arbitration (April 19)
3. Explain reverse cash and carry arbitrage
(Nov 19, May 19, Nov 19)

4. Imperfect hedge (Nov 19)

5. Arbitrage using futures (Apr 19)

Options 1. Option premium (Nov 18)

2. Put option (Apr 19)
3. Call option (Nov 19)
4. Explain what is meant by intrinsic value
or moneyness of an option contract (Nov
18, may 19, Nov 19)

Option pricing 1. Distinguish between binomial option

models pricing model and black schools option
pricing model (Oct 18, Apr 19)

Forward 1. What are the types of orders (Oct 18, Apr

clearing and 19)/What are the various orders that can
settlement in be placed in a derivatives market (Nov
derivatives 19)
market 2. Objectives of NSSCL (Apr 19)
Risks 1. Types of margin (Nov 19)

2. Explain span margin (Nov 19)