M2M

swarnendupathak
Finance Junkie
Posts: 119
Joined: Mon Sep 17, 2012 11:06 am

M2M

Postby swarnendupathak » Mon Nov 05, 2012 3:52 pm

A common problem when determining margin between groups is agreeing upon a mark-to-market (MTM) value. Frequently, credit groups find that major discrepancies can be explained by differences in pricing of one or two trades. Which of the following transactions is most likely to lead to a major dispute in MTM value?
Choose one answer.
a. 1,000 call options on ABC shares expiring in 2 months with a strike of $20, where the underlying is trading at $25
b. An agreement to buy 4,350 units of an asset in 3 months at $25.86 when the asset is now trading at $25
c. 400 put options expiring in 8 months with a strike of $100 where the underlying is trading at $25
d. A loan of $1,000 at an interest rate of 5% paid off in 3 months

Please state the logic...

Swarnendu

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content.pristine
Finance Junkie
Posts: 356
Joined: Wed Apr 11, 2012 11:26 am

Re: M2M

Postby content.pristine » Tue Nov 06, 2012 5:32 pm

Swarnendu,

This question is asking us which is most illiquid.

IMO, the answer is D.
The value of the loan can be valued at the current market interest rate for the remaining period (5%). However, after this, it is not traded in the market. So MTM is not possible.

A. Since the strike and underlying price is close, it should be liquid.
B. You can probably find a futures contract. It would be liquid.

C. The put option is very very deep in the money. It wouldn't be liquid.
Hence MTM pricing would be off..

The asset with least liquidity is D. However C would also be pretty illiquid too..

8-)

balajismz
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Posts: 63
Joined: Mon Nov 05, 2012 9:13 am

Re: M2M

Postby balajismz » Tue Nov 06, 2012 8:20 pm

Well comparing options C and D I would go with C and the reason being the huge difference in the strike price and the current price.

So there will be more chances of margin calls.

Balaji


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