文档库

最新最全的文档下载
当前位置:文档库 > PRACTICE EXAM A 2014

PRACTICE EXAM A 2014

Advanced I nvestments

Practice E xam

AFF 5040

PRACTICE E XAM

The f inal e xam w ill h ave 7 q uestions.

You m ust a nswer a ll q uestions f or a t otal o f 100 m arks

This p ractice e xam i s p rovided t o a ssist y our s tudy a nd i s n ot a d efinitive i ndication o f t he c ontents of t he e xam n or i s i t a s ubstitute f or f ull p reparation .

Merton p roposed a m odel i n w hich a f irm’s e quity i s a n o ption o n t he a ssets o f a f irm. F or simplicity s uppose t hat t he d ebt D i s a z ero--‐coupon b ond a nd m atures a t t ime T.

A lso s uppose t hat

V! : Value of the company's assets today

V! : Value of the company's assets at time T

E! : Value of the company's equity today

E! : Value of the company's equity at time T

D : Debt repayment due at time T

σ! : Volatility of assets (assumed constant)

σ! : Instantaneous volatility of equity

The B lack--‐Scholes f ormula g ives t he v alue o f t he e quity t oday a s f ollows:

E!=V!N d!?D e!!"N d!

d!=ln

V!

D+r+

σ!!

2T

σ!T

and d!=d!?σ!T

a)What r ational o ptions a re a vailable t o t he e quity h olders a t t ime T a nd w hat p ayoff d o t hese

choices i mply? (Hint: W hat i f V!

b)What i s t he v alue o f t he f irm’s d ebt t oday?

c)Using y our a nswer t o b) w hat i s t he s pread – a bove t he r isk--‐free r ate – i mplied b y t he

Merton m odel a bove?

d)Describe c redit d efault s waps a nd h ow t heir p ayoff c an b e d etermined?

A c all w ith a s trike p rice o f $60 c osts $6.

A p ut w ith t he s ame s trike p rice a nd e xpiration d ate c osts $4.

Required:

(a) E xplain t he c ircumstances i n w hich a n i nvestor w ould c onsider i nvesting i n a “straddle”

c ombination o f t he a bove c all a n

d p ut. (4 m arks) (b) C onstruct a t abl

e t hat s hows t he p rofit

f rom a s traddle. (4 m arks)

(c)Determine t he r ange o f s tock p rices t hat w ould l ead t he s traddle t o a l oss

(4 m arks)

[Total = 4 + 4 + 4 = 12marks]

Question3

PART (A) O F Q UESTION

Suppose t hat U S$ --‐ A$ s pot a nd f orward e xchange r ates a re q uoted a s f ollows o n t he S ydney f utures exchange:

Spot 1.725 A$/US$

90--‐day f orward 1.717 A$/US$

180--‐day f orward 1.708 A$/US$

Required:

Explain t he o pportunities t hat a re a vailable t o a n i nvestor i n t he f ollowing s ituations:

(a) 180--‐day E uropean c all o ption t o b uy 1 U S$ f or 1.68 A$ a t a c ost o f 0.022 A$

(b) A 90--‐day E uropean p ut o ption t o s ell 1 U S$ f or 1.74 A$

a t a c ost o f 0.020 A$ (8 m arks)

PART (B) O F Q UESTION

Assume t hat t he r isk--‐free r ate i s 10 p ercent p er a nnum. T he p rice o f o il i s c urrently $25 p er b arrel, and t he f utures p rice f or d elivery i n s ix m onths i s $26.25.

Suppose t hat a h igh l evel m eeting b etween t he U SA a nd S audi A rabia t o t ake p lace j ust u nder s ix months f rom n ow i s s uddenly a nnounced a nd t he w orld--‐view a nticipates t hat t he o utcome o f t he meeting w ill b e t hat S audi A rabia w ill a gree t o r aise o il p roduction s o a s t o l ower t he p rice o f o il. Reflecting t his v iew, t he s ix--‐months f uture p rice f or o il d rops f rom $26.25 t o $24.00 p er b arrel.

Required:

(a)Explain c arefully t he e xtent t o w hich y ou c onsider t hat t he a bove n ew f utures p rice o f o il

($24/ b arrel) r epresents a n “unbiased e xpectation” o f a ctual f uture o il p rices.

(b)Assuming t hat i nterest r ates r emain a t 10% p er a nnum, d etermine w hat y ou c onsider

will b e t he i mpact (if a ny) o f t he n ew f utures p rice ($24/barrel) o n C URRENT o il p rices.

)

Question 4

(a)Define and discuss the Sharpe Ratio and Treynor ratio as measures of portfolio performance

evaluation, a nd t he s ituations i n w hich e ach m easure i s t he m ost a ppropriate m easure.

(b)What is the problem with using the Sharpe measure for evaluation of an active portfolio

management s trategy?

(c)Compare a nd c ontrast t he C APM a nd t he F AMA a nd F rench 3 f actor m odel

(4+4+4 = 12)

Question 5

You a re a nalysing t hree f ixed i ncome s ecurities: A c orporate b ond w ith a n 8 p ercent s emi--‐annual coupon a nd p ar v alue o f $1000 w hich w ill m ature i n 3 y ears a nd h as a d uration o f 2.717 w ith a y ield to m aturity o f 10%. Y our s econd s ecurity i s a p erpetuity w ith a p ar v alue o f $100 c urrently s elling f or $95 t hat h as a c oupon o f 10% p aid a nnually. T he t hird s ecurity i s a 10 y ear $1000 z ero c oupon b ond which i s s elling f or $385.

(i)What i s t he d uration f or t he p erpetuity?

(ii)What i s t he d uration o f t he z ero c oupon b ond.

(iii)Calculate t he c orporate b ond’s m odified d uration

(iv)What i s t he c hange i n t he b onds p rice i f t he e xpected y ield t o m aturity f alls t o 9.5%

(3+3+3+3=12Marks)

Question 6

Technical a nalysis h as a l ot o f c ritics a nd s upporters a like:

a)Explain i n d etail h ow t he f ollowing m arket i mperfections m ay m ake t echnical a nalysis w ork: t he

way i nformation i s r eceived b y i nvestors, a nd i nvestor i rrationality.

b)What a re s ome o f p ragmatic c riticisms o f t echnical a nalysis?

(

c)Supporters o f t he R andom W alk H ypothesis c laim t hat s tock p rices h ave n o “memory”. W hat d o

they m ean b y t hat? W hat i s t he i mplication f or t echnical a nalysis? W hat d oes t he l iterature s ay about t he R andom W alk H ypothesis?

d)Given t he v iew t hat s tocks a re r andom w alks d iscuss t he c osts a nd b enefits o f u sing m utual

funds?

(

Question 7

Rocketlager L td i s a l arge l ocal b eer a nd b everage c ompany t hat h as a lways p aid s teady d ividends and i s c urrently t he t arget o f a h ostile t akeover b y G lobalbrew I nc. R ocketlager’s s hare p rice r ecently reached $5 s ince t he t akeover a ttempt b ecame p ublic b ut p rior t o t his i ts s hare p rice h ad f allen t o a s low s $4.20 a nd h as f luctuated a g reat d eal. G lobalbrew h as o ffered t o b uy a ll t he s hares i n Rocketlager L td. a t a p rice o f $5 e x--‐dividend (which i s t he c urrent s hare p rice, l ess a ny d ividends t o be p aid).

Rocketlager’s b oard h as r ejected t he o ffer s tating t he o ffer i s b elow t he t rue v alue o f t he f irm a nd just a nnounced a d ividend o f 25 c ents a s hare w hich w ill b e p aid s hortly. T he d ividend r epresents 70% o f t he r ecently a nnounced e arnings o f t he f irm f or t he f inancial y ear o n a p er s hare b asis. T he firm’s d ividends a nd e arnings a re e xpected t o g row a t a n a verage r ate o f 4% f or t he f oreseeable future. R ocketlager h as a b eta o f 0.7 a nd m arket r eturns a re e xpected t o b e a bout 10% a nd t he r isk free r ate i s 5%. A c ompetitor i n t he m arket t rades w ith a p rice--‐earnings (PE) r atio o f 14 i n t he market. Y ou a re a c urrent s hareholder a nd a re t rying t o d ecide w hether t o s ell y our s hares o r r etain them.

Required

a)Determine t he e xpected r eturn t o s hareholders g iven t he r ecently a nnounced d ividend.

b)What i s t he r equired r eturn b ased o n t he C APM?

c)Using t he d ividend d iscount m odel e stimate t he f undamental v alue o f a s hare i n

Rocketlager L td .

d)What i s t he r elative v aluation o f R ocketlager L td. b ased o n t he P E r atio?

e)Comment o n t he d ifferences i n t he e stimated v alue o f R ocketlager i f a ny a nd t he m erits o f

each m ethod o f v aluation.

f)On t he b asis o f y our t wo c alculations t o v alue t he f irm s hould y ou a ccept t he o ffer o f $5 a

share e x--‐dividend g iving r easons f or y our r ecommendation.