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Section-A

problem1) Define Swap Rate? What is the relationship between Swap rates & Par yields?

problem2) “An American option is always worth at least as much as a European option on the same asset with the same strike price & exercise date” Describe.

problem3) What trading strategy creates a reverse calendar spread? Also describe how the aggressive bear spread could be created using options.

problem4) Describe the principle of risk-neutral valuation.

Section-B

Case Study

The shares of the company are being sold for Rs.50 per share. A call option (strike price of Rs.49) for 200 days is available at Rs.4 per share. Annual risk free rate of interest is 7%. Standard deviation of the return of this share might be considered as 0.3.

problem1) Determine the value of the option. Use black & Scholes model, provided that the expiry period of the call option is 200 days.

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