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hello sir I have a couple of doubts in this paper
1) in ques1,Mehgam ,where is it mentioned in the question that we need to inflate currency of pesos and what rate have they used to inflate it?2) can u also explain me in breif the second part of (b): how have they found the value of the underlying asset and how do we decide in this part whether itll be a put or call option?
3)the second question,Awan co. why have they selected 3-7, if its decemeber now and amount is expected to be recieved on 1st feb 2014 wont that be 2 months?
4)for the 4th question part a I am a little confused as to how will the extra cash generated of 99m$ increase debt capacity?
1. We never ‘inflate’ exchange rates! However, since the question says that there is inflation in Megham of 8% and there is inflation in Chmura’s country of 2%, therefore automatically you are expected to adjust the exchange rate using the purchasing power parity formula given on the formula sheet. This is standard in questions involving investments in different countries.
2. As the examiners answer says, the value of the underlying asset it the total of the PV’s of the cash flows foregone in years 3, 4 and 5 (as already calculated).
It is a put option, because the real option available is the option to sell the entire project to Bulud.3. From now (1 November) to 1 February is 3 months, not 2 months!
4. The question says that they are able to borrow up to 100% of the total asset value. If they have more cash then they have more assets and can therefore borrow more.
With regard to your first two questions – why have you not watched my free lectures working through this question? You can find them from the main P4 page if you follow the link to “Revision Kit Live” !!
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