FIN359 Examination - January Semester 2010

FIN359 Examination - January Semester 2010 - FIN359...

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FIN359 Examination – January Semester 2010 Derivative Securities Saturday, 29 May 2010 10:00 am – 12:00 pm ____________________________________________________________________________________ Time allowed: 2 hours ____________________________________________________________________________________ INSTRUCTIONS TO STUDENTS: 1. This examination contains EIGHT (8) questions and comprises EIGHT (8) printed pages (including cover page). 2. You must answer ALL questions from Section A and any FOUR (4) in section B. 3. All answers must be written in the answer book. 4. Normal Curve Areas Tables is attached. At the end of the examination Please ensure that you have written your examination number on each answer book used. Failure to do so will mean that your work cannot be identified. If you have used more than one answer book, please tie them together with the string provided. THE UNIVERSITY RESERVES THE RIGHT NOT TO MARK YOUR SCRIPT IF YOU FAIL TO FOLLOW THESE INSTRUCTIONS. FIN359 Copyright © 2010 SIM University Page 1 of 8 Examination – January Semester 2010
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SECTION A (Total 40 marks) You must answer ALL the questions in this section. Question 1 Nick Leeson and Barings Bank Nick Leeson earned substantial profits by writing strangles on the Nikkei 225 Index during 1992 to 1995. Nikkei had been trading in the range of 19000 to 20000 during this period. However, on January 17, 1995 a severe earthquake struck Kobe and the Nikkei index fell to 19,350 and January 23, 1995, Nikkei dropped to 17,950. Leeson was confident that Nikkei would go beyond 19000 in a short time and he went long with 27158 contracts in Nikkei Index March futures on January 27, 1995. He increased his long position to 55206 March contracts and 5640 June contracts in February. However, the Nikkei continued to fall and the total amount of loss was so huge that Barings Bank collapsed on February 25, 1995. (a) Explain how trading in strangles resulted in gains during 1992 to 1994. (5 marks) (b) Why did Leeson start making losses on strangles as well as on a long futures position after the Kobe earthquake? (5 marks) (c) How could Leeson have avoided losses? (5 marks) Question 2 Tamil Nadu Steel Tamil Nadu Steel is a steel manufacturer in India which sells steel to customers all over the world. The steel price is denominated in US dollars and Tamil Nadu Steel quotes its prices to its customers in US dollars. The steel price is highly volatile and Tamil Nadu Steel tries to hedge the price risk by entering into forward contracts. It usually quotes its price on the 1 st of the month, delivers steel by 15 th of the month and customers make payment on 30 th of the month. The forward price of steel and the amount demanded by customers for the month of
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This note was uploaded on 03/30/2012 for the course FIN 359 taught by Professor Jp during the Spring '12 term at Singapore Institute of Management.

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FIN359 Examination - January Semester 2010 - FIN359...

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