s

[This qu·estion paper contains IO printed pages.]

•••
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Your Roll No ·-
.II I I I I I I I I I I I I

Sr. No. of Question Paper : 1211

A
Unique Paper Code 32357614
Name of the Paper
DSE-3 MATHEMATICAL
FINANCE
Name of the Course
B.Sc. (Hons) Mathematics
cncs (LOCF)
Semester VI
Duration : 3 Hours
Maximum Marks : 75

Instructions for Candidates

1. Write your Roll No. on the top immediately on receipt

of this question paper.

2. Attempt any two parts from each question.

3. All questions are compulsory and carry equal marks.

4. Use of Scientific calculator, Basic calculator and

Normal distribution tables all are allowed.

1. (a) Explain Duratjon of a ~era-coupon b~nd. A 4-year

.· bond with a y i e 1d of 10 % (continuous IY
compounded) pays a 9% coupon at the end of
each year.
.... .
. -•."' .... ..
•• I •O •• ._:_, • : •- • •• • 0 •

·:-. ....
• • ':'• ,. •• ,." •""• • • I , .. , , •
P.T.O .
... \ ' ' ... ,·, ... . . ..
.
 )
1211 3
1211 -,-··. ) ._
(d) Define Bond Yield and Par Yield. Suppose that
(i) What is the bond's price?
the 6-month, 12-month, 18-month, and 24-month
(ii) Use duration to calculate the effect on the zero rates are 5%, 6%, 6.5% and 7% respectively .
bond's price of a 0.3% decrease in its What is the 2-year par yield? (You can use the
exponential values : ex = 0.9753 , 0.9418, 0.9071 ,
yield?
0.8694 for X = -0 .025, -0.06, -0 .0975 , -0.14,
(You can use the exponential values: ex= 0.9048, respectively.)
0.8 r87 , 0 .7408, and 0.6703 for x = -0. l, -0.2,
-0 .3, and -0.4 , respectively) 2. (a) Explain Hedging. A United States company
expects to pay 1 million Canadian dollars in 6
(b) Explain Continuous Compounding. Suppose Rc
months . Explain how the exchange ra te risk can
denotes rate of interest with continuous
be hedged using
compounding and Rm denotes equivalent rate with 1. -S+ 2 ..\- 2.-
compounding m times per annum . Find the relation (i) A Forward Contract
between Rc and Rm. (ii) An Option .
( c) An investor receives -~ 1100 in ~ne year in return (b) (i) What is the difference between the over-the
for an investment of 1000 now . Calculate the counter market and the exchange-traded
perce11tage return per annum' with : market? ) 'M.11'~
(i) Annual compounding (ii) An investor enters a short forward contract
to sell 175,000 British pounds for US dollars
(ii) Semi-annual compounding
at an exchange rate of 1.900 US dollars per
•
(iii) Continuous compounding. 0 .
-..t pound. How much does the investor gain or __
lose if the exchange rate at the end of the
(You can use: ln(l.l) = 0.953) ~IL
=o •oq~3
.::. . L .. 1 contract is 2.420? \-,r_ rt?"'
.
P.T.0 .
.. --..- .... ·- - -· .... .. ,. .. '' .. .:.. . ::·- . .. ·- .~ . -·· . . ..... .
,...,. • ...•;.:-• ·-·--=
• •••,- I' • ••·
' - --. , -- •.,;~IIIIHIII:ffl
 all!
1211 5
·n.11 -· 4 . - - ---
(b) Derive the put-call parity for European options on
(c) A I -year forward contract on a non-dividend paying a non-dividend-paying stock. Use put-call parity
stock is· entered into when the stock price is
to derive the relationship between the delta of a
f 4 0, and the risk-free rate of interest is 10%
European call and the delta of a Eur.op_e an put on
per annum with continuous compounding. What is
a non-dividend-paying stock.
the forward price? Justify using no arbitrage
arguments . (e 0 ·' =l.1052) 7--- S..\--~ ( c) An investor sells a European call on a share for
4. The stock price is 4 7 and the strike price
(d) (i) A trader writes an October call option with a is 50 . Under what circumstances does the
strike price of f 3 5 . The price of the option investor make a profit? Under what circumstances
is f 6. Under what circumstances does the will the option be exercised? Draw a diagram
trader make a gain, showing the variation of the investor's profit with
the stock price at the maturity of the option.
(ii) Suppose that you own 6,000 shares worth
f 75 each. How can put options be used to (d) Define upper bound and lower bound for European
provide an insurance against a . decline in options on a non-dividend- paying stock . What is
the value of the ·holding over the next 4 a lower bound for the price of a 3-month European
months? put option on a non-dividend-paying stock when
the stock price is ~38, the strike pric~ is ~40, and
the risk-free interest rate is 10% per annum?
(a) Draw the , diagrams illustrating the effect o f
3.
changes in s·t ock p,r ice, strike price, and expiration ,.J. Justify using no arbitrage arguments. (c-0 .04 =
date on European
.
call and
.
put option prices 0.9753) "l "T' 2.- . s+ 2--
• when
. (a) A 4-month Eu~~p~an· cali' option on ·a dividend-
S = 50, K = 50, r = 5%, cr = 30%, and T = 1. 4.
0 paying stock is currently selling for f 50. The stock_
P.T.0.
. -. ,. . ,,. --·....
.. ~.,.. .
. .. , .. ... ... .... .... .
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-· •.•1•:• .... .... . ••:-·
.,
l~
. - - - ..._,...-o\._.,
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---
1211 7
H-H 6
(~) Consider a two-period binomial model with current
·-
price is <640, the strike price is <600, and a
stock price S 0
= t l 00, the up factor u = 1.3, the
div~dend of< 8 is expected in l month. The risk-
down factor d = 0.8, T = 1 year and each period
free intere st rate is l ~% per annum for all
there for an being of length six months. The risk-free interest
maturities. What opportunities .. are
rate is 5% per annum with continuous
arbitra g eur? (e- 0 -04 = 0.9608)
compounding. Construct the two-period binomial
(b) Consider a one-period binomial model where the tree for the stock. Find the price of an American
stock can either go up from S0 to S 0u (u > l) or put option with strike K = t 95 and maturity
down from S to S d (d < l ) . Suppose we have an T = l year. (e-0 ·025 = 0.9753)
0 0
option with payoff fu if the stock moves up and
payoff fd if the stock moves down. By considering 5. (a) Stock price in the Black-Scholes model satisfi es
a portfolio consisting of long position in t. shares
of stock and a short position in the option, find the
price of the option. Explain how the price can be
lnS, ~ ,P llnS0 + G- ";)r ,u'T]
expressed as an expected payoff discounted by where <j>(m, v) denotes a normal distribution with
the risk-free interest rate. mean m and variance v. Find Var[ST].
.(c) A stock price is currently t _50. It is known that (b) What is the price of a European put option on a
at the end . of two months it will be either t 53 or non-dividend-paying stock when the stock price is
48. The ' risk-free interest rate is 12% per 69, the strike price is t 70, the risk-free interest
annum with continuous compounding. What is the rate is 5% per annum, the volatility is 35% per
annum, and the time to maturity is _six !11onths?
value ·of a two-month European call option ~ith a
7
·· strike price of~ 49? Use rro-"arbitrage arguments . . .
. . 1·
(You can use exponentla values: e
-0.0144 == 0 985 ,
0
·
0..,., &)
( eo.02 = 1.0202) e-o.02s = 0.9753 ) . Jo< ~,,-,r·'
~o b r
i , ~ - .. f' p.T.0- ..
• :J,- i;,r .. n '
.·'• \ ~;,;,-fl \
 1211 __ 9
1211 -~~---
interest rate is 5% per• annum and the time to
(c) Let V be a lognormal random variable with ro being
maturity is 20 weeks, and the stock price volatility
the s!andard deviation of In V. Prove that
is 30% per annum. (In( 49/ 50) = -0.0202)
E[max(V - K, 0)] = E(V)N(d 1) - KN(d 2 )
(b) What is the relationship between delta , theta and
where gamma of an option? Show by substituting for
various terms in this relationship that it is true for
di = lnf~]+!f d2 = lnf~J ~z
w (J)

a single European put option on a non-dividend-

paying stock.
and E denotes the expected value. Use this result
to derive the Black-Scholes formula for the price (c) Find the payoff from a hear spread created usin g
of a European call option on a non-dividend paying put options. Also draw the profit diagram
corresponding to this trading strategy.
stock.
(d) A stock price is currently t 50. Assume that the (d) Companies X wishes to borrow US dollars at a
expected return from the stock is 18% and its fixed interest rate. _Company Y wishes to borrow
volatility is 30%. What is the probability distribution Indians rupees at a fixed rate of interest. The
for the stock price in 2 years? Calculate the mean amounts required by the two companies are
and standard deviation of the distribution. roughly the same at the current exchange rate .
(e 0 · 18 =i.1972) The companies have been quoted the following
interest rates, which have been adjusted for the
(a) Discuss gamma o.f a portfolio of options and impact of taxes : I
6.
calculate the gamma of.~. European call option on
• . (
a non-dividend-paying ~t-o ck where the stock price Rupees Dollars
CompanyX 9.6% 6.0%
is f 49, the strike price is f 50, the risk-free
Com~Y 11.1% 6.4%
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-" 1211
.....
10
Design a swap that will net a bank, acting as
intermediary, 50 basis points per annum. Make
the swap equally attractive· to the two co1npanies
and ensure that all foreign exch"ang~ risk 1s
assumed by the bank.
 >

.':

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9.!!estlon4

~ution 4{cili

we know that th e priceof call option on a stock payi~~ dividend satisfies

• c So - Ke-rr - D (1)
Where D denote the present value of the dividends. -

The present value of the strike price is Ke-rr = 60oe- 0·12 x 4/ 12 =rll576.5. The present value of the
. _ ae-o.12x1/12 _-ii7 9 8 .
dividen d 1s 0 - -, . . ecause -

• 50 < 640 - 576.5 - 7.9 ·

the•condition in equation (1) is violated. An arbitrageur ~hould buy the option and short the stock.
This generates 640 - 50 = 590. The arbitrageur invests 7.9 of this at 12% for one month to pay
the dividend of 8 in one month. The remaining 582.1 is invested for four months at 12%. Regardless
of what happens a profit will materialize.

If the stock price declines below Goo' in four months, the arbitrageur loses the 11150 spent on the
option but gains on the short position. The arbitrageur shorts when the stock price is 111640, has to
pay dividends with a present value of 1117 .9, and closes out the short position when the stock price is
1!]600 or less. Because 1!1576.5 is the present value of 111600, the short position generates at least
640 - 576.5 - 7.9 = 55.6 in present value terms. The present value of the arbitrageur's gain is
therefore at least 55.6 - 50.0 = 5.6.
If the stock price is above rll600 at the expiration of the option, the option is exercised. The
arbitrageur buys t~e stock for rll600 ~n four months and closes ou~ t_he short position. The present
value of the 121600 paid for the stock 1s 11l576.5 and as before the d1v1dend has a present value of rll7 .9.
The gain from the short position and the exercise of the option is therefore exactly 640 - 576.5 -
7.9 = 55.6. The arbitrageur's gain in present value terms is exactly 55.6 - 50.0 = 5.6.
;_ ,, -r :J- -1-'(
Solution 4(bl;_
Consider a portfolio consisting of +ti share_
s of stock and -1 option.

Let Vu a·nd Vddenote the value of the portfolio when the stock moves up and down respectively.
Then
Vu = tiS0 u - iuandVd = tiS0 d - id•
We choose ti such that the portfolio becomes riskless, that is, Vu = Vd . I
i.e. , tiSou - iu = Mod - id ·1
ti= iu - id .klJ
So(u - d)
For ·this value of ti the portfolio is riskless and therefore due to no arbitrage, the portfolio grows at
risk,free interest rate. If V0 denote the initial value of the portfolio, then

Vo= e-rrvu = e-rT(tiS 0 u - iu) ~ l - - \ ? )

If /o denote the option price, then ·
Comparing (2) and (3)
, we get

!::,So - fo :::: e-rr(l::,S

fi oU - fu)
o:::: l::,S0 - e-rr(l::,S
Substituting value of A f ou - fu) = e-rr[llSo(err - u) - t..]
rom (1) and simplif in . u
y g, we obtain the price of option as

fo :::: e -rr [(err - d) - (u - err) ]

ll - d fu u - d fd • •,
Writing p - (err -d) "l
- ~ ' we obtain

. fo = e-rr[Pfu + (1 - p)fd] . )
Smee prepresents probability of up m . .
exp . ovement in the risk neutr I Id
ress,on as expected payoff in th . k a wor 'we can interpret above
' ns ·nMrnl wo,ld disoo,nted by the clsk-free lntecest mt,.

,.
Solution 4(cl.

Here, So = SD, Sou = 53, S0 d = 48, K = 49, r = 0.12, T = .3...

12 .

If Ii, and id _c/enote the payoff of the call option when the stock p-rice moves up and down
respectively, then ·

fu = max(Sou - K,0) = max(S3 - 49,0) =4

and
fd = max(S 0 d - K, 0) = max(48 - 49, 0) = 0.

Consider a portfolio consisting of +Li shares and -loption.

Let Vu and Vddenote the value of the portfolio when the stock moves up and down respecth,1~ly. '
Then ·

l'u = liS0 u - fu = 53li - 4 andVd = liS0 d - fd = 48li.

we choose t:,, such that the portfolio becomes riskless, that is, Vu = Vd.

i.e. , 53li- 4 = 48li

4
A= S= 0.8.
For this !J., we have Vu =Vd = 38.4 so that the portfolio value is certain. Due to no arbitrage, the
portf~lio grows at risk-free interest rate. If V0 denote the initial value of the pQrtfolio, then

rT
V0 e- = 38.4 (1)

If fo denote the option price, then

 I
I

Vo = flS0 - fo = 0.8 x 50 - f0 .
Using In (1), we get

( 40 - / 0 )e 0·02 = 38.4

( 40 - /o) X 1.0202 = 38.4

.·. lo= 2.3
I .

Solution 4(d):

Weare given
. .
.
So=
.
.100,u=l,3,d=0.8T=l
'
At-OS
'u -
2
· , n = , r = 0.05.

The two~peri~d binomial.tree for the 'stock price is given below:

le L/
.~ ----l.\cl S o
S_,

------.,6
J '- S c,

The risk-neutral probability is given by

ert:.t - d eo.osxo.s - 0.8 1.025 - 0.8 0.225
0 45
p = u - d = 1.3 - 0.8 = 0.5 = °o.s = ·
We can find the option price by backward computation in the two-step tree using risk neutral
valuation formula.

0
Al
/

/ ' t--ilf

t:I

" • J-l{

f. Jd
 I ..

We have

fuu = max(K - = max(95 -

u 2 S0 , 0) 165,0) =0
fud = max(K - udS0, 0) = max(95 - 104,0) = 0 \
fuu = max(K - d 2S0 , 0) = max(95 - 64,0) = 31

By risk-neutral valuation formula, we obtain

fu = e-:-rllt[Pfuu + (1- p)fud] = 0

fd =e-n:\t[Pfud + (1 - p)[dd] =16.33
Since the option is American, value at node Bis maximum offu and payoff from early exercise at
_
node 8. · _.--

Payoff from early exercise at node B = max(K - uS0 , 0) .= max(95 - 130, 'o) = 0.

Value at node B = O.

Similarly, payoff from early exercise at node C = max(K - dS0 , 0) = max(95 - 64, 0) = 15.

Value at node C = 16.33

Hence, price of American put= e- 0 ·025 x 0.55 x 16.63 =8.92.

if Y ,' c.J ./.:- ·,fru:_,,_l /•·,'
f ,1· u... u u,-wi-41.,·.l•. . . ,) ut.Ji''t ?-- , , \...r,, ~k;, .; l"-ff •,J. ,/
. ),.v'-'--
guestion 5

Solution S{al

We are given that

. •
In Sr ~¢ [1ns0 + (µ -•:) T,u'rl • •

cr 2 ) T - a2T and y = Jn Sr so that Y ,..;<f>(m, v ). Using the formula for MGF

Let m = In S0 + ( µ - 2 ,v - .
of normal distribution, we have -
1 1.-1-
tY] _ mt+ 2V ·[,
£[e - e .. :
• 4

Therefore,
i

Aryd
l

Hence variance of Sr is
2 [ ])2 52 2µr( cr
2
T_ 1)
var[Sr ] =E[Sr]-(ESr = oe e ·
 l

I
I
Solyllon S(b):
,t1 : We are given S0 = 69, K = 70, r =0.05, (j =0.35 and T =0.5 yr
f ·
The_refore,

. In(~) + (r + ~
2
) T
d1 = K ..ff = 0.1666
(j T
•
I

d2 = d 1 - (j..ff = -0.0809.
The price of European put option is

p = Ke-rTN(-dz)-S 0 N(-df)

= 7oe- 0-0sxo.sN(0.0809) - 69N(-0.1666)

= 70 X 0.9753 X 0.5323 - 69 X 0.43 = 6.40

So\µt\on Slt\

let m denote the mean of ln V. Then ln V ~cp(m, w 2 ).

Define Q = Inv-w m. Then Q is standard normal, i.e., Q~¢(0,l). Let h(x) denote the pdf of standard
I
normat We have
' \
E[max(V - K, O)]

= L:
= E[max(em+wQ -

co
K, O)]

max(em+wx - K, O)]h(x)dx

1 lxz
\I
_ ( (em+wx - K)-e-, dx
- AnK-m ffrr /
w

00 1 -2.xz

k
00

= -e
nK-mffrr
-w-
1 m+wx-.!:xz
2
d
x-
1 lnK-m
w
K r-c. e
v2rr
2 dx

= em+w22 Loo -1e _.!:cx-w)2d

2 x- KI.co h(x)dx

w
{2rr -~ w

= em4 (co _l_e-½y2 dy- KP (Q '2:. _ln_K_-_m_)

)111K-m_wffrr W
.· w '

In K - m)
/
In K - m- w
j
2
w2 ( ) (
= em~p Q S -KP Qs---w-
2

a-<--t . {S,c:__~ - s dn:J ""'½ r !IN\ .. ,--Q

Jrk C'--':J r<-Y) Arr -(_v--J ')(

Solution S(d) • Q

The probability distribution of Sr is lognormal, that is, In Sr is normal. Indeed, we have

Sr -¢ [1n S + (µ -~) T, a2T]. ·

2
-. /
In 0
I

Qr, In Sr ~</> [1n 50 + (0.18 -

0 09
~ ) x 2, 0.09.x 2 j.
Or, In Sr ~</>[4.18, 0.18]
,.
The mean of Sr is given by

E[Sr] = S0 eµT = 71.67

l
The variance of Sr is given by

Therefore, standard deviation of Sr is given by

l
......,,..,.,,.__ •.:'lt,., . • • J tKt' , in ct ,. ana e.xptraii ion ·d ate on option
041 c;.:, lll 01,V U.\. p pi.;~I .:, 1.,1
')O(Yc0 and T
, I:'
= 1.
·
prices wl1en o =
.......... u
S 50.. K
VL
= 50, r
W.1
= ,>io, a
6
- ,.,
r:O/ -
.

Put option
~\\~tion price,p
-·50,-pnce.~
.· . 50

40 ·
-~i) --

20 I

Stock· .
Stock prlce,So
tO · _price, So
·oL
. -..J.-~~- --:;;----;stiho-i'i1oino._ 20 40 60 80 too
2.0040 60
(a)· (b)

Qa!toption · Put option

pnce,p
. r .• '

... ·.'ffeici: 'd 50

50 ·

40 I
30

. 20'.,: 20

\i). : _ Strike
. ;pl'.ice,IC
10 Strike
price, K
I
0
i\/ ' ·io · · 46 60 80 . 100 . 0 20 40 60 80 100
(c) . {d)

· Put'option

\
price,p
10

8 ••
6

• 1.-
Time to
ei pirati~tj; T
2 'l'imeto
expiration:, r
\\
1.1 1:6 OA OJ ll li
(f)
•
c, ·11_.~ - - - ~- - -~ --~·~·.
(e) •
'
. .

. -~~ ~i~t~eme-aii.impottant relationsijp between p !\Ild-c. Consider the following two ·

.·.pQrtfbli.~s r:"•--~-- ,..- •- .,-----··.- •····~,· - · -~•-.... --- -·· - ·- ~----- --- . --· ~-. - --- ..
••
Pbrifouo·A·: ·one Eur~pean call option plus an amount of cash equal to Kc-rr
\
./
·c:·
/>l)rt/o1io ·one European .put optionplus one share
.·Both are worth
max(Sr, ·If)

· at e:<pization of the bptions. Because the options are European, they cannot be exercised
prior to the expiration date. The portfolios inust therefore have inP.ntiNll ,rn\11pc t;..rl'l\r
 . .d,·1HI 11n_v1.11g I·,. p111.-r n ll 1mrit II rrc nNfl l t iu1e t
Fur .1 1ul11 -d1v1 !'I or • •v ~i,·c,; 11 1 ,.,

Tlwn b_,.- ci ilfr•rc-111 iiH in g wi th rcspcc-1 to slork price S. we get

==> -
De
OS
D1,
OS
up
iJS
De
+
DS - l.
,
- . /

T_Jiis ~hows t.hat t.li c del ta o f a Emop ca11 p u t eq uahi t li e cldta of the
spond 1ng E11ropean call less ] .
corre-9· · . ·."..
l../ -r 1- S
w .
1
Solution
-· The investor makes a profit if the price of the stock is b elow "· 54 on the
cxpirnt.io n date. If the stock price is belmv·.? 50. t he option ,vill not be ex-
ercised, ,w d the investor makes a profit of/ 4: If stock price is h etwee~i_~90_.
and -~ 54. the option is exercised a nd the invest or makes a profit bet.ween_t,0 --.. .
m_1d 4. T he variation of investor's profit with the stock price is as shown. · ·
below: · - -~
I
I
I
6 · Profit ~~_)

2.

0
0 45 so
-2

.4 .

-6 . ' .

··· · ~
~-1---~+,f~
-8 '

_Solution 3(d) _

An American or European call option gives the h~lder th~ right to buy_one-shate of a:
stock for a certam price. No matter what happens, the option can n~er be ~orth.mote
. than the stock Hence, the stock price is an upper bound to the option pnce:
c S0 and C So • 4

I An American or European put-option gives the holder the right to sell-one share of a
I stock for K. No matter how low the stock price b~omes, the option can never worth he
more than K. Hence, ,1
p ~ K and P~ K
 f- ..
Alower boun9. for the price of a European call option on a non-dividend-paying stoGk is
-rT
S0 - Ke .

·. put option on
For a European --- -- · • ·dend-paymg
a non-divi · 8tock ' a lower bound for the
price is .
Ke"":'r - So
-- ---· -·- - ....

Here So = as, I( = 40, T = 0.25 and == 0.-10. A lower bound for op-
il
1·
tion price
K e-tT - So.
Thus 4oe- 0 - 1 xo.25 - 38 = 1.01.

j ~pl_qtf.ah,~{i3] .
7~f··(
'; ;,'_ ,i:¥J~0,\\1) bf a p1\rtfolio of ot,tioiis on an underlying asset is the rate of change of
. . :the ti~rtfii1iQ's ~elta with feSI)ect to the price of the underlying asset: It is the second
· \,,. :·;'~(~~!\\~;
.-,.u . -~.~Vattve
.' . . _of tne ·110-rtfo\i:o .With tes-pect to asset price:
.
. . ff.". •., . •. . n'l
q .· - o-n
,. r== as2
. .

aEuropean call or put option on a non-dividend-paying stock, the gamma is' '·--·.
7 - --·,·· ·. ·
. .
• For
given by

·I-lere S 0 = ,19: K = 50, T

gamma is
= 0.:3846, a = 0.3 and r -= 0.05. The option's
0

sotution ofb1
-.._.!~ - --
Y-

The :rela.~ionship between delta, theta, n,nd gamma is

.e + T ..S,w./\ + -er
l ') '
2 S'"r = rTI .
For a put option on a non~dividen<l-pay inµ; stock

6. - N(rl1) - l
N'(d1 )
r -
Socrll
e = -SuN'(d1)cr . -- - rT
2,,/T + I I\(~ N(-d2).
 ,•

Solution G{c)
mr
---- - ~
Payoff from a bear spread created with put options,
Payoff from Payofffrom Total
Srock price
lo'lg put option sh~ ,) • .,

,
range

---- 77---~- / -·
K2 - Sr . - (K1 - Sr) K2 -c K1
Sr~ K1 K2 - Sr O Ki - Sr
K1 <Sr< K2 0 0 0
I .J,...,_________
.__,,,
Sr~ K2

-=···.. ,. ,....,,.,;;~~
-•m zm-em.....a:lli'- -

.• Figure 10.4
Profit from bear spread created using put options. · ·

I Profit
''

I
, ,
, ,,
,
,,
,,
___________------- , ----
.----
I -.---'.---____;c___,--- '
__.....----~· -~

---
-"
I .-
I _,
rt

. . .I .

t ion 6(d} TJ,crc a J.5% p,a•· ""'""" dJffe,-cnti,J between the n1pee, rates aiid a 0-4% ·
pc,- annum diffeccutial between th" dollax rates- Thus the t,otal g,uu to ;;II· . ·· . , 1 -·, .
purtica from the swap is 1.5 - 0-4 1-1% per annnm- The bank ,,-;quires
o,S%per3""""' ' Jcuving 0.3% P" annum for X and Y- The swap sbould J,wi , --~ ·
;fo X borrowing doJl,,rs at r, ,O - 0.3 5.7% per annum and to Y Doctowing · ,_
, rupees at 11 .l - 0 3 l().8% per'-"'""" The app.-opriate ax,angemei,t iS as

...-----1 . r___,___ $6.4% Company

Company ~ · Financial y
t9.6% X / _J · Institution
1.-- ·

$5.7%
/