MJY(SFM 12/05)

I am away on vacation at the moment and I do not have my Revision Kits with me (and this exam is no longer available on the ACCA website).

I get home on Wednesday and so if you ask again then, I will answer you immediately 🙂

I am back home now – thanks for waiting 🙂

I think that maybe you are misreading the table in the question.
It says that for receipts you read across, so for receipts – MJY is receiving $90 and $50, Subsidiary 1 is receiving $40 and $20, and Subsidiary 2 is receiving $30.

Similarly, for payments we read down, so for payments, – MJY is paying $170 and $120,and subsidiary 2 is paying $50

So the total receipts are 90 + 50 + 40 + 20 + 30 = 230, and the total payments are 170 + 120 + 50 = 340

Therefore net payment by the group of $110.

(One of the payments/receipts is within the group ($50 from Subsidiary 2 to MJY) and so you could ignore this one completely from both payments and receipts (because we are only really interested in the net amount from/to outside the group), but you would end up with exactly the same net result).

In future, please start a new thread when it is a question on a new topic – it is so that everyone can benefit from the answers.

I don’t know what you mean by ‘rearranging’ the call strike price. The effective interest rate when using futures (and interest rate options are options on futures) is always 100 – the futures price.

You really need to watch my free lectures on interest rate futures and options. Also, with regard to creating a collar there are various combinations of put and call that can be chosen – I have uploaded a short article on how collars work.https://opentuition.com/articles/p4/interest-rate-collars/

Because they are depositing money, they will buy a call option in order to provide a floor – a minimum interest rate.
If the choose to buy a call at a strike price of 95.75, then this will limit the minimum LIBOR interest receipt to 4.25%. However, the question says that they can invest at LIBOR – 35 basis points, so the minimum interest the company would receive is 4.25 – 0.25 = 4%.
But, the have to pay a premium for the option of 0.165%, which reduces the effective minimum interest to 4 – 0.165 = 3.835%.

If they are prepared to accept a limit on the maximum interest – a cap – and therefore create a collar, then they will also sell a put option and receive the premium. If they choose to sell a put option at a strike price of 95.50 then they will receive a premium of 0.170 which ends up giving them minimum interest of 3.835 + 0.17 = 4.005%

You need to total up the receipts and payments between MJY and subsidiaries, and the four third party companies.

MJY receives 75 from Co 3.
Sub 1 receives 85 from Co 2
Sub 2 receives 52 from Co 3
So total receipts of 212

Sub 1 pays 50 to Co 3.
Sub 2 paus 65 to Co 4
So total payments of 115

So net receipt = 212 – 115 = 97

You are welcome 🙂

If the option is exercised, then the contract amount is effectively converted at the exercise price. In addition, as always, there is the premium that is payable immediately the options are purchased.

Because of the fixed size contracts, we know from the very start the balance of the transaction that will not be hedged by the options. If we want to protect against the risk on this amount then we can use a forward contract on it immediately using the forward rate that is quoted as of today.