Question 1
The put-call parity result for a non-dividend-paying stock states that the European put price plus the stock price must equal the European call price plus the present value of the strike price.
TRUE
FALSE
Corporate Finance End Term: 22 December 2024, Set QDB1 (September 2024 term)
The IIT Madras BS Corporate Finance (Corporate Finance) End Term paper sat on 22 Dec 2024, in the September 2024 term, set QDB1: 35 questions for 100 marks in 180 minutes. Every question is below with its answer. Take it as a timed mock test to be marked, or read it through first.
- 35
- 100
- 180 min
- 30
- 5
Show answer
Correct answer
TRUE
Question 2
The delta of an option is the ratio of the option price to the stock price.
TRUE
FALSE
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Correct answer
FALSE
Question 3
In the Black-Scholes pricing formula, stock prices are considered to be log-normally distributed.
TRUE
FALSE
Show answer
Correct answer
TRUE
Question 4
A put option is in-the-money when the stock price is higher than the strike price.
TRUE
FALSE
Show answer
Correct answer
FALSE
Question 5
Assets of a commercial bank include loans, deposits with other banks and the central bank, and various securities that the bank holds.
TRUE
FALSE
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Correct answer
TRUE
Question 6
The part of the minimum-variance frontier that lies below the global minimum-variance portfolio is called the efficient frontier
TRUE
FALSE
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Correct answer
FALSE
Question 7
According to CAPM, projects with higher beta require a higher expected rate of return.
TRUE
FALSE
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Correct answer
TRUE
Question 8
When assets have a perfect positive correlation, there are no benefits from diversification.
TRUE
FALSE
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Correct answer
TRUE
Question 9
The yield curve shows the relation between expected return and standard deviation.
TRUE
FALSE
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Correct answer
FALSE
Question 10
An investor cannot diversify the systematic risk.
TRUE
FALSE
Show answer
Correct answer
TRUE
Question 11
You found an ancient clay pot in your home that was purchased by your father 25 years ago for Rs 1,000. You auction it and sell it for Rs 50,000. What is the annualized rate of return that is earned on the clay pot?
8.52%
16.94%
20.00%
32.14%
Show answer
Correct answer
16.94%
Question 12
The Tata Steel stock is trading at Rs 500 today. Tata Steel is expected to pay a dividend of Rs 20 per share next year. If the growth rate of Tata Steel's dividend is 2% every year and the appropriate rate of return is 7% per year, then according to the Gordon growth model
The Tata Steel stock is underpriced, and an investor should buy Tata Steel shares.
The Tata Steel stock is overpriced, and an investor should buy Tata Steel shares.
The Tata Steel stock is underpriced, and an investor should sell Tata Steel shares.
The Tata Steel stock is overpriced, and an investor should sell Tata Steel shares.
Show answer
Correct answer
The Tata Steel stock is overpriced, and an investor should sell Tata Steel shares.
Question 13
There are two assets: a risk-free asset that offers a 7% rate of return and a risky asset that has an expected rate of return of 20% and a standard deviation of 10%. What is the slope of the Capital Allocation Line consisting of these two assets?
2
1.3
-1.3
-2
Show answer
Correct answer
1.3
Question 14
There are two risky assets that are negatively correlated with ρ= -0.5. Asset 1 has an expected return of 15% and a standard deviation of 10%. Asset 2 has an expected return of 20% and a standard deviation of 12%. What are the weights of the assets in the minimum variance portfolio?
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Correct answer
Question 15
Sloka Inc. is considering two different projects, A and B, for investment and can choose at most one project to invest in. Project A costs Rs 10,000 and is expected to generate Rs 5,000 in year one and Rs 7,000 in year two. Project B costs Rs 12,000 and is expected to generate Rs 8,000 in year one, Rs 4,000 in year two, Rs 2,000 in year three, and Rs 1,000 in year four. Sloka Inc.’s required rate of return for these projects is 5%. Which of the following is true?
Sloka Inc. should prefer Project B as it has a higher net present value than Project A.
Sloka Inc. should prefer Project A as it has a higher net present value than Project B.
Sloka Inc. is indifferent between Project A and Project B as both have the same net present value.
Sloka Inc. should not invest in either projects A or B as both have negative net present value.
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Correct answer
Sloka Inc. should prefer Project B as it has a higher net present value than Project A.
Question 16
A US Dollar buys 80 Russian Rubles. The GDP deflator in Russia is 110, while the GDP deflator in the US is 105. What is the real USD to RUB exchange rate? [Note: Exchange rate is defined with the US as a home country and Russia as a foreign country]
83.81
76.36
95.45
104.76
Show answer
Correct answer
76.36
Question 17
The prevailing interest rate in India is 8%, and the prevailing interest rate in the UK is 4%. What is the expected rate of appreciation of INR to GBP exchange rate?
-3.70%
-1.84%
3.84%
1.62%
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Correct answer
-3.70%
Question 18
A trader invests in XYZ Inc. by buying 100 shares in June for Rs 50 per share. She also buys 100 European put options for Rs 5 each as insurance in case the stock drops sharply. The put options have a strike price of Rs 52 and a maturity date of December. What is the gain or loss if the spot price on the maturity date is Rs 55?
Rs 0, no gain, no loss
Rs 500 gain
Rs 500 loss
Rs 1000 gain
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Correct answer
Rs 0, no gain, no loss
Question 19
Which of the following describes a long position in an option?
A position where there is more than one year to maturity.
A position where there is more than ten years to maturity.
A position where an option has been sold.
A position where an option has been purchased.
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Correct answer
A position where an option has been purchased.
Question 20
Consider a put option and a call option with the same strike price and time to maturity. Which of the following is FALSE?
If the put option is in the money, the call option will be out of the money.
If the call option is in the money, the put option will be out of the money.
If the call option is at the money, the put option will be out of the money.
If the put option is at the money, the call option will also be at the money.
Show answer
Correct answer
If the call option is at the money, the put option will be out of the money.
Question 21
The price of a stock is Rs 54. A trader buys a call option on the stock with a strike price of Rs 58 when the option price is Rs 5. When does the trader make a profit?
When the stock price is above Rs 60
When the stock price is above Rs 63
When the stock price is below Rs 52
When the stock price is above Rs 54
Show answer
Correct answer
When the stock price is above Rs 63
Question 22
When the stock price increases with all else remaining the same, which of the following is true?
Both call and puts increase in value.
Both calls and puts decrease in value.
Calls increase in value while puts decrease in value
Puts increase in value while calls decrease in value
Show answer
Correct answer
Calls increase in value while puts decrease in value
Question 23
When interest rates increase with all else remaining the same, which of the following is true?
Both call and put increase in value
Both calls and puts decrease in value.
Calls increase in value while puts decrease in value
Puts increase in value while calls decrease in value
Show answer
Correct answer
Calls increase in value while puts decrease in value
Question 24
Which of the following describes a covered call?
Buy a call option on a stock plus a long position in the stock.
Buy a call option on a stock plus a short put option on the stock.
Sell a call option on a stock plus a short position in the stock.
Sell a call option on a stock plus a long position in the stock.
Show answer
Correct answer
Sell a call option on a stock plus a long position in the stock.
Question 25
You purchase a one-year call option with a strike price of Rs 50 and two one-year put options with a strike price of Rs 50. The call premium is Rs 4, and the put premium is Rs 2. The current share price is Rs 45. If one year later, the share price increases to Rs 60
You make a profit of Rs 12.
You make a profit of Rs 10.
You make a profit of Rs 2.
You incur a loss of Rs 2.
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Correct answer
You make a profit of Rs 2.
Question 26
The price of a three-month European call option on a non-dividend-paying stock with a strike price of Rs 80 is Rs 8. The stock price is Rs 85, and the annual risk-free rate is 8% (continuously compounded). What is the price of a three-month European put option on the stock with a strike price of Rs 80?
Rs 10.65
Rs 7.21
Rs 4.87
Rs 1.42
Show answer
Correct answer
Rs 1.42
Question 27
A stock is trading at Rs 50 today. In 3 months, the stock price can either increase to Rs 60 or decrease to Rs 40. The three-month risk-free rate is 4%. A three-month call option has an exercise price of Rs 55. What is the risk-neutral probability that stock price increases?
40.0%
50.0%
53.3%
60.0%
Show answer
Correct answer
60.0%
Question 28
The call option price increases by Rs 1.
The call option price increases by Rs 0.5.
The call option price increases by Rs 0.4.
The call option price decreases by Rs 0.6
Show answer
Correct answer
The call option price increases by Rs 0.5.
Question 29
You invest 80% of your money in a security with a beta of 1.45 and the rest of your money in risk- free security. The beta of your portfolio is
0.80
1.16
1.46
1.81
Show answer
Correct answer
1.16
Question 30
Your opinion is that Cipla stock has an expected rate of return of 16%. Cipla has a beta of 1.5. The risk-free rate of return is 5%, and the expected market rate of return is 12%. According to the capital asset pricing model, Cipla is
Overpriced
Underpriced
Fairly priced
Insufficient information
Show answer
Correct answer
Underpriced
Question 31
The current price of a non-dividend-paying stock is Rs 50. Over the next six months, it is expected to rise to Rs 65 or fall to Rs 45. Assume the risk-free rate is zero. A six-month call option with a strike price of Rs 55 is trading at Rs 5. How many options are required to hedge the purchase of 2 shares of the stock?
**Note:**The answer is a single digit integer between 0-9.
Show answer
Correct answer: 4
Question 32
A risky asset has a 12% expected rate of return and a 20% standard deviation of the rate of return. If the Sharpe ratio of this risky asset is 0.8, then what is the prevailing risk-free rate of return (in %)?
**Note:**The answer is a single digit integer between 0-9.
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Correct answer: 4
Question 33
You purchase a one-year call option with a strike price of Rs 40 and a one-year put option with a strike price of Rs 40. The call premium is Rs 4, and the put premium is Rs 3. The current share price is Rs 38. If one year later, the share price increases to Rs 50, then how much profit do you earn (in Rs)?
**Note:**The answer is a single digit integer between 0-9.
Show answer
Correct answer: 3
Question 34
Suppose the risk-free rate is 2% and the expected market return is 7%. If the value of the beta of security A is 1.2 according to CAPM, what is the expected rate of return (in percentage terms) on security A?
**Note:**The answer is a single digit integer between 0-9.
Show answer
Correct answer: 8
Question 35
Security X has an expected return of 18% and a standard deviation of 25%. Security Y has an expected return of 16% and a standard deviation of 20%. If the rates of return of the two securities have a correlation coefficient of 0.8, what is their covariance (in %)?
**Note:**The answer is a single digit integer between 0-9.
Show answer
Correct answer: 4