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Dear John, I still have problem in evaluating whether to exercise or not especially when an investor needs to hedge using collar.
\could you throw some light on how the evaluation is done.
Thanks.
Dear John,
Yes, I have got the answers, however, due to work schedule, I couldn’t attend the debrief webinar where I could have asked the question.
The full question is a page and half long, but all the information regarding the overdraft and debt is what I have provided here. The only missing part is “The company has set a financial target of repaying the overdraft using retained earnings within three years.”
My approach using the amortised cost is not yielding the same answer as the model answer,
Dear Rick, the way I would approach the selection of the Strike Price is by determining whether it is a Put or a Call Option. I normally choose the Put options prices that gives me the highest receipt and the Call Option which gives me the lowest interest payment. If it is a Put Option, the net receipt will be interest receipt less premium paid for the option and Call Option the net payment would be Interest plus premium.
Remember that any seller would always like a price that gives him/her maximum receipt and any buyer would like to pay the lowest possible price.
Thanks.
I do agree with ACCA that the papers on the website appear exactly as and when they were sat at the time and have not been updated. Most of these past papers have been rewritten and published in the current Revision Kits/ Question Banks to reflect the current exam structures and question types.
However, it is my suggestion that ACCA considers publishing at most the last four sittings past papers and remove those past papers which are more than four sittings from its website.
Most of these Question Banks/ Revision Kits would not be having questions from the last two sittings and as such, it would be prudent for ACCA to have these past papers published on its website for students references.
Hi John, still on this same question part (b) (ii), at the spot rate of $1·4780 – $1·4820/£, the amount over hedged was converted at $1.4780/£ and the under hedged at $1.4820/£. From my understanding, an over hedged payment would mean having more of the counter currency that required by the hedge and hence while converting it would be a receipt. In this case, the bank/currency dealer will offer a higher rate, $1·4820/£ and vise versa for the under hedge.
A look at the December 2002 examiner’s answer for this question they had used the same rate as in BPP Kit.
You support in clarifying this is highly appreciated. Thanks.
Hi, from the scenario, “… Daikon Co is expecting to borrow $34,000,000 in five months’ time. It expects to make a full repayment of the borrowed amount in 11 months’ time. Assume it is 1 June 2015 today. … The contract size is $1,000,000…”
The number of contract will be Amount to be hedged/Contract size x duration of the borrowing/3.
The duration of the loan is 11months – 5months = 6months. This will give you 68 contracts ($34,000,000/$1,000,000 x 6months/3)
Thanks.
Many thanks John.
Would it be wrong to assume that the forward rate (1.0677) given in the question would be a good estimation of spot rate on transaction date?
In Polytot (SFM, June 2004) BPP kit Qn. 85, the forward rate was used as the spot rate on transaction date to predict the futures price on transaction date.
Many thanks John,
My question is why exercise the option at strike price of $/CHF 1.06 instead of lapsing and using the spot rate on transaction date?
Many thanks John.
On another note in the same question while evaluating the option, model answer exercised the options in all the strike prices.
However, my analysis shows that at exercise price of $/CHF 1.06, it would be cheaper to lapse the offer and convert at spot rate (assuming forward rates is the best prediction of spot rate in 4 month’s time), this would give a cost of CHF 4,739,159 compared to CHF 4,773,585.
Grateful for your guidance on this.
Hi, could you please explain how the nominal cash flow was calculated. I got the same nominal rate as per BBP Kit at 9.2%, however when I multiply year 2 (20X5) real cash flow of £52 by 1.092 I get 56.78 and not 54.63 per the Revision Kit. Thanks.
Many thanks John.
I realised where the mistake was, I made error in copying combined earning (including net redundancy cost) as 7,230 instead of 7,330
With the weighted average P/E ratio of 23.3 and
combined earnings of 4,410 + 2,870 + 750 – 1,000(1-0.3) = 7,330The market value is 23.3 x 7,330 = 170,789 which is just over the pre-acquisition value.
Tax rate = 1890/6300 x 100 = 30%
Many thanks John. However, looking through, I noticed BPP has error in discounting the present value, $19m is already discounted, discounting again by 0.592 leads to double discounting.
On another note, would it be proper to get the average of the gearing ratio 20.5% (18+23)/2, instead of using gearing at 18% and 23% separately.
Thanks.
Salam Contract, literally called Bai al-salam is similar to a forward contract where the buyer pays in advance for the delivery of raw materials or fungible goods (a commodity that is freely interchangeable with another in satisfying an obligation) at a given date. The spot price of the item includes the profit of the person who has taken the task of purchasing good and, of course, the cost of the product.
Kindly please send me P2 & P3 Kaplan Mock exam papers for June, 2013 . Thank you. opiod@live.com
