*** P4 December 2012 Exam *** Instant Poll and comments***

Q4: my NPV for Dur5 is 360k, annuity factor for 11% with 15 year is 7.191

Beta of combined business (1.1) = beta property x weight of property + beta service x ?eight of service => beta service => equity require rate of return of new firm with only service

Yes, correct, splitua

how did you all calculate the debt in question 1 i used the debt yield method to get pv

I also got negative npv for question 2

Question about exchange rate risk:

I) 3 exposure: case 1: transaction; case 2: economic; case 3: translation
Ii) mitigate economic: use power parity => counterpurrchase, bartender…
Iii) computing case 1: forward: get about 956k; call option: 937k above and alternative is money market hedging get about 950k
Iv) gain/loss translation: do not remember exactly but loss about 480, all item except equity will be translate at the spot rate and the difference will be transsfered to equity as gain/loss

Hey for Economic Risk I translated amount that are in MR @ first spot then devalued rate by 20% and then value and difference is loss…am i right?

harripool: not debt yield. Question said that the firm bond rate is bbb and change to a+ and the rate of bbb is risk free rate plus 90 points, a+ is risk free rate plus 60 point => bond value before and bond value after

@aqadirshaikh said:
Hey for Economic Risk I translated amount that are in MR @ first spot then devalued rate by 20% and then value and difference is loss…am i right?

Yes! You got your 50 marks!

Did anyone else calculate the forward rate on Q2 using parity theory. Also I found the option part hard because there was no contract size given if i remember right. What did people use for this to calculate premium?

This examiner definitely makes you think nothing like passed questionns

@kristina88 said:
I found q2 difficult, got confused … 🙁
Q3 I also discounted it to yr 4, as mentioned above. As it is at end of year 4 than needs discounting to yr4, if anything you lost 1 mark here, max!
Anyone chose q5?

“Hey… If the Annuity begins at the end of Year 4, the PV calculation using the annuity factor brings it to Year 3….!! Isn’t it..?? So I discounted it by 1/1.11^3 to bring it Year 0 terms…?”

@thieuson

i think what you have mentioned in most of the cases are correct, Case 01 – it was the transaction risk due to the exchange rate differences between the transaction date and subsequent settlement date. Case 02 – It was translation Risk whiich is refres to translation of operation of a foreign subsidiary. Case 03 – was economic Risk
Isnt it?

Oh! In case 1 i have forgotten to mention about money market hedges as an alternative hedging method. i will loose some marks for that hope still i got enough marks to get through? how many marks were allocated to that sub part? anyone remember?