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In the practice Q9 Toytown part ( b):
Can you please explain the 86.25 ? Does it mean that today the price of the futures is 86.25??
I uderstood that .
Then i added a 2% increase to that which gave me 87.98. I used these two figures to calculate the profit
By doing : 10m * (87.98-86.25/400) which gave me 4325.
I do not quite understand the ticks.
Please explain this to me with the ticks its really hard to udrstand
86.25 is the price at which the futures are currently priced – that means that it is todays price.
Why did you increase the futures price? If interest rates increase, then the futures price falls. Also, the futures prices is effectively a percent (86.25 is equivalent to 3.75%) so a movement of 2% gives rise to a futures price of 84.25.
With regard to ticks – a tick is the smallest movement in the futures price, which is 0.01. However you never need to use ticks in the exam (or in this question) (but they are explained in the lecture).
Another thing is that in part (c) it clearly says in the q that the company is taking an IRG of 14%.
So refering to the requirements its asking you to calculate the effect of the IRG at 14% if the interest rates goes up by :
(i) 2 %
(ii) same thing
(iii) goes down by 1%
In you answers you took 14% itself when calculatung the actual cost, I do not understand why??
I took 16% as being the actual rate then claimed at 14%.
The question does not ask you to show how IRG’s work – it clearly only asks whether it will be more or less expensive, and so all that you need is to calculate the total cost.
If the actual interest is 16%, then OK you pay 16% and then claim back 2% on the IRG, but the net cost will be 14% as a result.
With an IRG the maximum interest will effectively be 14%, but if the actual interest rate is lower then you pay the lower rate and do not claim on the IRG.
Very Good Lecture. God bless. When coaching prices of renowned online classes such as Kaplan -LBS have been so high by making available such a quality stuff at free of cost indeed need kudos. Keep it up.
What if we calculate the profit like this: 6,000,000 pounds x 0.02 x (6/12) = 60,000
Logic: We bought the futures for the same amount of loan then multiply it with profit and as the profit is yearly so we multiply it with (6/12) as the loan is for 6 months and so the profit should match the additional expense of interest of 6 months.
Does this makes sense?
Well your method is much harder than the tutors method. What if you cant get the exact amount of futures? Your method is just going to be confusing plus its logic is also not sound.
THIS PAPER IS VERY CHALLENGING AND INTERESTING AS WELL. THE LECTURE HAS REPOSED A LOT OF CONFIDENCE IN ME AND I’M SURE THIS THIRD TIME, I SHALL BE READY. WHAT IS THE NAME OF THE LECTURE??? CAN ANYONE TELL ME>
John moffat – the same tutor who replies on the ask the tutor forums
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