This Paper has 20 answerable questions with 0 answered.
F–14(AFM)
Revised Syllabus |
| Time Allowed : 3 Hours | Full Marks : 100 |
| Part A is compulsory and answer another five questions from Part B. |
PART A
Attempt all the ten questions, each carrying 2 marks |
| Marks |
| 1. | (i) | Buying and selling call or put option with the same strike price but different expiration dates is called | (a) | Long hedge | (b) | Short hedge | | (c) | Horizontal option spread | (d) | Nearby contract. |
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| | (ii) | Among the instruments listed below which is/are option like instrument(s)? | (a) | Rights | (b) | Warrants | | (c) | Puttable and callable bonds | (d) | All of the above. |
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| | (iii) | Combination of two fixed floating currency swaps to form a fixed to fixed currency swap is called | (a) | Circus swap | (b) | Extendible swap | | (c) | Forward swap | (d) | Vanilla swap. |
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| | (iv) | A New York bank wants to fund their a/c, called Vostra a/c, with an Indian bank by Rs. 10 million. What dollar amount the New York bank would deposit in the Indian banks a/c, called Nastro a/c, maintained in New York when inter bank rate is US $ 1 = Rs. 44.50–70? | (a) | US $ 223713.64 | (b) | US $ 224216.37 | | (c) | US $ 224719.10 | (d) | US $ 223965.00 |
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| | (v) | Mr. A. a corporate customer of bank B, receives an inward remittance of US $ 50000 when inter bank spot rate is US $ 1 = 44.40-50 and bank margin is 0.25% on cover rate. The rate B would quote to Mr. A after rounding off is | (a) | 44.50 | (b) | 44.29 | | (c) | 44.45 | (d) | 44.40 |
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| | (vi) | By using the constant growth formula, find out the cost of equity of a company which has growth rate of 5%, last year's dividend Re. 1.00, and current market price of the company's equity share is Rs. 20 | (a) | 10.25 | (b) | 10.00 | | (c) | 8.25 | (d) | 12.00 |
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| | (vii) | A share holder has received bonus shares in the proportion of ! : 1. What is her stakeholding in the company (indicate the most appropriate alternative)? | (a) | Stake holding remains the same | | (b) | Stake holding has gone up with more shares available for trading | | (c) | Stake holding was gone up | | (d) | Stake holding remains the same with more shares available for trading. |
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| | (viii) | | (a) | GDR route is used only to raise new capital from international market. True/False. | | (b) | Buy–back of share always leads to reduction in capital. True/False. |
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| | (ix) | | (a) | Companies prefer to issue floating rate bond to take care of ________ | | (b) | Indicate the odd–one in the following:
book building, greenshoe option, underwriting, road show. |
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| | (x) | Match the following: | binary option, Asian option, compound option, barrier option. | | (Use the above items and write against the right match from the list below). | | (a) | A put on call option _______ | | (b) | Knock out or knock in______ | | (c) | Pay–off based on average price _______ | | (d) | Cash or nothing _______. |
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| 2. | (a) | Explain the concept, structure and process of assets based securitization. | 8 | (0) |
| | (b) | Distinguish between ‘pay–through’ and ‘pass–through’ certificates. | 4 | (0) |
| | (c) | What are the benefits of securitization to a housing finance company? | 4 | (0) |
| 3. | A portfolio manager purchased 1000 equity shares of Reliance industries Ltd. @ Rs. 510 per share. He wants to hedge the position by writing an April call with a strike price of Rs. 530 and call premium Rs. 10. Alternatively he wants to hedge by buying put option of strike price Rs. 510 and premium of Rs. 10 | (a) | Find out his profit or loss if the share price goes up to Rs. 540. |
| (b) | Find out his profit or loss if the share price goes up to Rs. 525 till the date of expiration of the option. |
| (c) | Find out his profit or loss if the share price comes down to Rs. 490. |
| (d) | Does the strategy of buying a stock and writing a call manage his risk effectively? |
| (e) | Under which circumstance should the portfolio manager buy a put option? |
| (f) | Assume that the share price goes to Rs. 490, what will be the profit or less of his portfolio if he buys put option? |
Marks:- (a) 2 (b) 2 (c) 2 (d) 2 (e) 2 (f) 2 (g) 4 | 16.00 | (0) |
| 4. | LB Ltd. has decided to acquire machine M costing Rs. 63,000. It will have an operational life of 4 years, with nil scrap value.
Tax is payable at 30% on operating cash flows in the same year. Capital allowances are available at 25% a year on a reducing balance basis. The company has the opportunity either to purchase the machine or to lease it under a finance lease arrangement, at an annual rent of Rs. 20,000 for four years, payable at the end of each year. The company can borrow to finance the acquisition at 10%.
Should the company lease or buy the machine? | 16 | (0) |
| 5. | (a) | 9–year Government of India security is quoted at 10.85%. The 364 T. Bill is quoted at 11.30. Last year Indian National Bank had issued a fixed rate bond under statutory requirement at 16% coupon for a period of 10 years. Now when remaining 9 years are yet to expire, the Bank wants to convert their fixed rate obligation to floating rate due to anticipation of decline in interest rates. Market quotation for fixed to floating rate swap is T–Bill rate vs. 75 bp over 9–year Government of India security. i.e. T–Bill rate = 11.6%.
If T–Bill decline 20 bp over the current year and rises by 5 bp every year thereafter, what is the effective cost of funds to Indian National Bank for 10 year period. | 8 | (0) |
| | (b) | MN, a UK company, has a substantial portfolio of its trade with American and German companies. It has recently invoiced a US customer the sum of $ 5,000,000, receivable in one year's time. MN finance director is considering two methods of hedging the exchange risk: | Method 1: | Borrowing present value of $ 5 million now for one year, converting the amount into sterling, and repaying the loan out of eventual receipts. | | Method 2: | Entering into a 12–month forward exchange contract with the company’s bank to sell the $ 5 million. | The spot rate of exchange is £ 1 = US $ 1.6355.
The 12–month forward rate of exchange is £ 1 = US $ 1.6125.
Interest rates for 12 months are USA 3.5%; UK 4%. | You are required to calculate the net proceeds in sterling under both methods and advise the company.
(Ignore bank commissions). |
| 8 | (0) |
| 6. | For imports from UK, Philadelphia Ltd. of USA owes £ 6,50,000 to London Ltd., payable on May, 2004. It is now 12 February, 2004.
The following future contracts (contract size £ 62,500) are available on the Philadelphia exchange: Expiry
March
June | Current futures rate
1.4900 $ / £ 1
1.4960 $ / £ 1 |
| (a) | Illustrate how Philadelphia Ltd. can use future contracts to reduce the transaction risk if, on 20 May the spot rate is 1.5030 $/£ 1 and June futures are trading at 1.5120 $/ £. The spot rate on 12 February is 1.4850 $ / £ 1. |
| (b) | Calculate the "hedge efficiency" and comment on it. |
| 12+4 | (0) |
| 7. | Consider the followingdetails of a proposed capital investment: | (a) | Cost of the project is estimated to be Rs. 435 crores which includes: | (i) | Contingencies of Rs. 30 crores; | | (ii) | Margin money for working capital of Rs. 10, 5 crores; | | (iii) | Interest during construction of Rs. 31 crores; and | | (iv) | Capital issue expenses of Rs. 13, 5 crores. |
| | (b) | Incremental investment on working capital is estimated to be (Rs. Crores): | Year | 0 | 1 | 2 | 3 | | Inc. WC | 105 | 323 | 7.0 | 5.6 |
| (c)
(d) | Salvage value has been estimated to be Rs. 80 crores.
The operational cash flows are projected as follows (Rs. crores): Year
1
2
3
4
5
6
7
8
9
10 | PBIDT
42
111
125
125
125
125
125
125
125
125 | Taxation
8
6
9
14
33
39
44
47
48
48 | Interest
25
46
36
37
16
11
5
1
0
0 |
| | (e) | Project will be financed with a debt of Rs. 268 crores and the remaining through equity capital. The overall cost of financing the project would be 13 percent.
Calculate NPV of the cash flows. Is this project financially available? |
| 16 | (0) |
| 8. | You work in AB Ltd. Your Finance Director plans for acquiring YZ Ltd. You are provided with the following data: | AB Ltd. | YZ Ltd. | Expected earning per share
Expected dividend per share
No. of shares
Current market price | Rs. 12
Rs. 8
2000000
Rs. 180 | Rs. 5
Rs. 2
1200000
Rs. 50 |
Your estimates about YZ indicates expected steady growth of earnings and dividend to the tune of 6% per annum. However, under the new Management the growth rate is likely to go up to 8% per annum without additional investment. | (a) | You are asked to calculate cost of acquisition by AB Ltd. if Rs. 60 is paid for each share of YZ Ltd. | | (b) | If the agreed exchange ratio is one share of AB Ltd. for every three shares of YZ Ltd., in lieu of the cash acquisition as per (a) above, what will be the net cost? | | (c) | Compute the gain from acquisition. | | (d) | If the expected growth rate continues to be 6% p.a., how will the new share price as we as cost be different? |
Marks:- (a) 4 (b) 4 (c) 4 (d) 4 | 16 | (0) |
