Question 1
The put-call parity result for a non-dividend-paying stock states that the European put price plus the present value of the strike price must equal the European call price plus the stock price.
TRUE
FALSE
Corporate Finance End Term: 22 December 2024, Set QDB3 (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 QDB3: 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
FALSE
Question 2
The delta of an option is the ratio of a change in the option price to the corresponding change in the stock price.
TRUE
FALSE
Show answer
Correct answer
TRUE
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 call option is in-the-money when the stock price is higher than the strike price.
TRUE
FALSE
Show answer
Correct answer
TRUE
Question 5
Liabilities 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
FALSE
Question 6
The part of the minimum-variance frontier that lies above the global minimum-variance portfolio is called the efficient frontier.
TRUE
FALSE
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Correct answer
TRUE
Question 7
According to CAPM, projects with higher beta require a lower expected rate of return.
TRUE
FALSE
Show answer
Correct answer
FALSE
Question 8
When assets have a perfect positive correlation, there are no benefits from diversification.
TRUE
FALSE
Show answer
Correct answer
TRUE
Question 9
The yield curve shows the relation between interest rates and maturity.
TRUE
FALSE
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Correct answer
TRUE
Question 10
An investor can diversify the systematic risk.
TRUE
FALSE
Show answer
Correct answer
FALSE
Question 11
You found an ancient painting in your home that was purchased by your father 20 years ago for Rs 1,000. You auction it and sell it for Rs 30,000. What is the annualized rate of return that is earned on the painting?
8.52%
18.54%
27.38%
32.14%
Show answer
Correct answer
18.54%
Question 12
The Tata Steel stock is trading at Rs 300 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 underpriced, and an investor should buy Tata Steel shares.
Question 13
There are two assets: a risk-free asset that offers a 6% rate of return and a risky asset that has an expected rate of return of 15% and a standard deviation of 10%. What is the slope of the Capital Allocation Line consisting of these two assets?
1.5
0.9
-0.9
-1.5
Show answer
Correct answer
0.9
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
Sahitya 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 12,000 and is expected to generate Rs 5,000 in year one and Rs 10,000 in year two. Project B costs Rs 10,000 and is expected to generate Rs 5,000 in year one, Rs 4,000 in year two, Rs 3,000 in year three, and Rs 2,000 in year four. Sahitya Inc.’s required rate of return for these projects is 5%. Which of the following is true?
Sahitya Inc. should prefer Project B as it has a higher net present value than Project A.
Sahitya Inc. should prefer Project A as it has a higher net present value than Project B.
Sahitya Inc. is indifferent between Project A and Project B as both have the same net present value.
Sahitya Inc. should not invest in either projects A or B as both have negative net present value.
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Correct answer
Sahitya Inc. should prefer Project B as it has a higher net present value than Project A.
Question 16
A British Pound buys 100 Russian Rubles. The GDP deflator in Russia is 110, while the GDP deflator in the UK is 105. What is the real GBP to RUB exchange rate? [Note: Exchange rate is defined with the UK as a home country and Russia as a foreign country]
83.81
76.36
95.45
104.76
Show answer
Correct answer
95.45
Question 17
The prevailing interest rate in India is 9%, and the prevailing interest rate in the UK is 5%. What is the expected rate of appreciation of INR to GBP exchange rate?
-3.67%
-1.84%
3.81%
1.62%
Show answer
Correct answer
-3.67%
Question 18
The share price for Infosys is Rs 500 today. A trader invests in Infosys by buying 100 European call options on Infosys for Rs 10 each with a strike price of Rs 490 and maturity of three months. What is the gain or loss if the share price on the maturity date is Rs 495?
Rs 0, no gain, no loss
Rs 500 loss
Rs 500 gain
Rs 1000 loss
Show answer
Correct answer
Rs 500 loss
Question 19
Which of the following describes a short position in an option?
A position in an option lasting less than one month.
A position in an option lasting less than one year.
A position where an option has been sold.
A position where an option has been purchased.
Show answer
Correct answer
A position where an option has been sold.
Question 20
Consider a put option and a call option with the same strike price and time to maturity. Which of the following is TRUE?
It is possible for both options to be in the money.
It is possible for both options to be out of the money.
One of the options must be at the money.
One of the options must be either in the money or at the money.
Show answer
Correct answer
One of the options must be either in the money or at the money.
Question 21
The price of a stock is Rs 84. A trader buys a put option on the stock with a strike price of Rs 80 when the option price is Rs 10. When does the trader make a profit?
When the stock price is below Rs 90
When the stock price is below Rs 84
When the stock price is below Rs 77
When the stock price is below Rs 74
Show answer
Correct answer
When the stock price is below Rs 74
Question 22
When volatility increases with all else remaining the same, which of the following is true?
Both calls 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
Both calls and puts increase in value
Question 23
When the strike price increases 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
Puts increase in value while calls decrease in value
Question 24
Which of the following describes a protective put?
Buy a put option on a stock plus a long position in the stock.
Buy a put option on a stock plus a short position in the stock.
Sell a put option on a stock plus a short call option on the stock.
Sell a put option on a stock plus a long position in the stock.
Show answer
Correct answer
Buy a put option on a stock plus a long position in the stock.
Question 25
You purchase two one-year call options with a strike price of Rs 80 and a one-year put option with a strike price of Rs 80. The call premium is Rs 4, and the put premium is Rs 3. The current share price is Rs 78. If one year later, the share price increases to Rs 87
You make a profit of Rs 14.
You make a profit of Rs 3.
You incur a loss of Rs 3.
You incur a loss of Rs 11.
Show answer
Correct answer
You make a profit of Rs 3.
Question 26
The price of a three-month European put option on a non-dividend-paying stock with a strike price of Rs 60 is Rs 6. The stock price is Rs 58, and the annual risk-free rate is 8% (continuously compounded). What is the price of a three-month European call option on the stock with a strike price of Rs 60?
Rs 9.45
Rs 5.19
Rs 2.09
Rs 0.64
Show answer
Correct answer
Rs 5.19
Question 27
A stock is trading at Rs 100 today. In 3 months, the stock price can either increase to Rs 120 or decrease to Rs 90. The three-month risk-free rate is 5%. A three-month call option has an exercise price of Rs 105. What is the risk-neutral probability that stock price increases?
40.0%
50.0%
53.3%
60.0%
Show answer
Correct answer
50.0%
Question 28
The call option price increases by Rs 1.
The call option price increases by Rs 0.6.
The call option price increases by Rs 0.5.
The call option price decreases by Rs 0.6
Show answer
Correct answer
The call option price increases by Rs 0.6.
Question 29
You invest 60% of your money in a security with a beta of 1.35 and the rest of your money in risk- free security. The beta of your portfolio is
0.81
1.25
1.81
2.25
Show answer
Correct answer
0.81
Question 30
Your opinion is that Cipla stock has an expected rate of return of 15%. 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
Overpriced
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 70 or fall to Rs 40. 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 10% 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.
Show answer
Correct answer: 6
Question 33
You purchase a one-year call option with a strike price of Rs 20 and a one-year put option with a strike price of Rs 20. The call premium is Rs 1, and the put premium is Rs 2. The current share price is Rs 19. If one year later, the share price decreases to Rs 15, then how much profit you earn (in Rs)?
**Note:**The answer is a single digit integer between 0-9.
Show answer
Correct answer: 2
Question 34
Suppose the risk-free rate is 4% and the expected market return is 9%. If the value of the beta of security A is 0.6 according to CAPM, what is the expected rate of return (in %) on security A? **Note:**The answer is a single digit integer between 0-9.
Show answer
Correct answer: 7
Question 35
Security A has an expected return of 18% and a standard deviation of 20%. Security B has an expected return of 16% and a standard deviation of 25%. If the rates of return of the two securities have a correlation coefficient of 0.4, what is their covariance (in %)?
**Note:**The answer is a single digit integer between 0-9.
Show answer
Correct answer: 2