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THE UNIVERSITY OF NEW SOUTH WALES SCHOOL OF BANKING AND FINANCE

FINS2624 PORTFOLIO MANAGEMENT FINAL EXAMINATION – SESSION 2, 2012

1. Time allowed – 3 hours 2. Reading time – 10 minutes 3. Answer all questions. 4. For Part A, mark the answers on the generalized answer sheet provided. For Part B, write the answers in the answer booklet. 5. This paper must not be retained by candidate 6. Candidates may bring to the examination approved calculators 7. Candidates must not bring to the examination any notes or books 8. Print your name and student number, and sign the paper on the top left hand corner of this page.

The following equations are provided:

Ct = StN(d1) – Xe-r(T – t)N(d2)

ln   where d1  

St

  r   2  T  t  X 2 







T  t 

; d 2  d1  

T  t 

St is the current stock price at time t X is the exercise price r is the continuously compounded risk free rate per annum  is the annualized standard deviation of returns on the underlying stock T-t denotes the time remaining to maturity

Some more sample questions from the textbook: Answers on next page Chapter 20: Question 7, 9, 11, 21 Question 11: There is a mistake in the textbook. The line should read “January call options with a strike of $45 are selling at $2, and January puts with a strike price of $35 are selling at $3”. Chapter 21: Question 13, 31, 46 Chapter 24: Question 11

Chapter 20 7. a. From put-call parity:

P  C  S0 

X 100  10  100   $7.65 T (1  rf ) 1.10.25

b.

Purchase a straddle, i.e., both a put and a call on the stock. The total cost of the straddle is: $10 + $7.65 = $17.65

9.

a. i. A long straddle produces gains if prices move up or down, and limited losses if prices do not