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Hey I would like to know whether it was a buy/ sell futures and call/ put options for question 2, anybody remember?
To be honest Q2 confused me, especially that interest was gonna go +/- 0.09% at the transaction date, so i assumed will be 2 situations of buy first and then do sell. Examiner will clarify later. I just pray to pass this time.
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this wasn’t a bad paper. question 1 was very long did. we have to do Black Scholes option pricing. or was that a curveball to throw us off. omg i forgot to multiple by 4 months for my future contracts. yes the cost of equity 12.6% and wacc was 9%.
@lee
it should be a put option- Topics: 0
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A. For currency hedge,
1. Decision Rule (for futures)
Hedge Exposure Receipt Payment
Other than $ Sell Buy
$ Buy Sell2. Decision Rule (for Options- Buy)
Hedge Exposure Receipt Payment
Other than $ Put Call
$ Call PutB. For Interest rate hedge,
1. Futures
Lending perspective – Buy futures today to hedge against interest rate falls , sell later
Borrowing perspective – Sell futures today to hedge against interest rate rises , buy laterWhen it comes to interest rate hedge, one must not forget to multiply by Loan Duration (which was 4 months) / 3 months for the no. of contracts. I think it was about 32 contracts i.e. $48m/2m x 4/3. ,
Buy June Futures (30/06) (the last one I think) , with one month to expiry as it expired on 30/06 with receipt on 1/06.
Basis = Open Future Rate – Open Spot (rate of bank) , was something negative.
Then Unexpired Basis = Basis x Time to expiry / Total months , Basis x 1/8 , from Now 1/11/13 to 30/06/14 i.e over 8 mths
Closing Future Rate = Closing Spot rate + Unexpired basis
Closing Future Px = 100 – Closing Future RateThen do the usual comparison of Closing Future Px with the futures Px given to calculate profit/loss in future market on the 32 contracts ($48m)
Then adjust with the spot (cash) market to get net figure.For Options – Buy Call Options
Call option is exercised if Closing Future Px is higher than Exercise Px
Compare Exercise Px (given in Q) with Closing Future Px to make decision whether to exercise or not.
For Option Premium ($) = 32 contracts x $2M x Premium Given in table/100 x 3/12For FRA, I have chosen 3V7 , is that right? I think it was receipt $48m in 3 month’s time then invest it over 4 months for a project later.
Just my thoughts. Anyway one will get mark for all steps shown, so even with some minor errors, no big deal!
I started off with Q2 first..
Q2 – I dunno if there was some mistake or something.. The spot Int rate was 4.09% but the options and futures were quoating at very low premiums..
I also dint find the amount of interest and then find out the effective rate… I just added/ subtracted the ticks from the spot rate to arrive at the effective rate… It is also a correct way of doing when the hedge is perfect but I dont see that in any of the text books.. Will i be deducted marks for not calculating the amount of interest but rather directly arriving at the interest rates..???Q3 – PV of FCF was a huge 3k odd million figure for me… Tht would be a considerable premium to the market value… I dunno if I was right on it… But what did u guys get..??? It all seemed right though.. coz the growth rate was is perpetuity… Anyways part b was confusing.. I dint know what to write…?? and part c I just discussed the alternative forms of finance available with a cautious note on additional debt finance as the gearing was already 40%..? Did I miss something here too..??
Q1 – I got a negative NPV of 650,000… I dunno if it was right.. I also wrote an assumption to an effect that the extra 5% tax suffered was not available as credit.. In the options part you dont calculate the PV from year 2 or year 5 or so on… U just need to calculate the value of option with Pa – the total cash inflows from the project for the whole 5 years… Pe would be 28M… I got a 1.03 M value for option… SO the project would be worthwile if the value of option was also considered… Shame that I could not spend more time on the report… Time was up before I could phrase it in professional language and in a professional format… shame that really…
On a whole, I expect to just make it..
Anybody else got the same answers as I did..??
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I got a negative npv for my project and whilst I know it’s not about getting the exact figures,I think it should
Have been positive. Just wondering did I mess up on something silly on The CA for example on the machinery. I know the machinery was bought in T0,so were the first CA claimed in T1
Or T0? I put them in t1 as since this was the first year there were taxable
Profits against which we could use the CA. I think I might have made the wrong call however so if people could say which is the correct way to deal with the CA that would be appreciated thanks!In relation to ques 1 b I used pe as the 28. Pa is the PV of the cash flows t3 -t5 as this is was the company would have to have given up if they sold the project to Bulud.
For ques 2:
Int rate risk. Buy futures,call options
Delta. Did discussion of what it is and how use n(-d1) to calculate # options to hedge against a drop in Pa on a put optionwhat was the requirement in Q1 B-2
Was it an application of Black and scholes formula- Topics: 0
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does anybody know how is P4 marked – per step, per chosen element, per fully accurate calculation? i am aware that once you made error it is taken only once…
also if not taken past cost in calculation of NPV but with no saying in assumption this fact, is it marked or not?- Topics: 0
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Was not difficult but the time pressure knock me down , just let ‘s hope for the best in February
Q1 – Put option as you have the option to sell. In fact this question is a replica of the article on investment appraisal by Sunil Bandari
if I am not mistaken, Pa is the the sum of the PV from year 3 to 5
Q3 – As far as I can remember
Equity value of M = 210M shares x 5.80 = $1,218M
Equity value of N = 200M shares x 2.40= $ 480MWeighted Ba = [(1218×0.9)+(480×1.2)] / (1218+480) = 0.98
Therefore : 0.98 = Be x [60/(60+40×0.8)
Hence Be = 1.5
Ke = 2% + 7% x 1.5 = 12.5%
WACC = 12.5% x 0.6 + 4.55%x0.4×0.8 = 9% roundedHope this helps
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I agree with all contributors to this forum. Overall the paper was fair compared to the June 2013 Paper. However, time management remained a problem for most of us. The question that I enjoyed most was Question 2. It was about choosing 3-7 FRA, Buying March Futures contracts and buying March call options. I got 115 Ticks as the difference between March Futures price and the spot Interbank rate. However at close out there were 46 unexpired basis points. I just pray that the examiner will be lenient when marking our work so that we pass the paper
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Much better compared to June paper. Q1 was almost twice as long last time.
hey some one plzz plzz answer my doubts
1. in q1 partb) pa= cashflows 4m yr3 onwards? I used dis and got d1 as 5.08. How in da world do we use a table 2 find dat value coz it shows max till 3
plus in part c ey asked 4 additional business risks…like??https://www.accaglobal.com/content/dam/acca/global/PDF-students/acca/p4/exampapers/p4-2013-dec-q.pdf
Can OT tutors give thier solution to the exam? like before stndard solution in feb 14?
@Richard
This is exactly what I got. What did you get for combined company’s value then?Answer all the questions, know how to do, but not enough time, some steps may miss, but better than diet Jun 2013!
Q3 premium calcs … now I’m sure I was wrong. It should rather be: (5.80 / 2 + x -2.40)/2.40 = 30% => x (premium) = 0.22 per share and if premium = 50% than x = 0.7 per share. Well… completely wrong on exam, but something new learnt now 😉
Has anybody done and may comment Q4 a? I’m afraid I did it too easily … means I was wrong, again …
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I agree with all contributors to this forum. Overall the paper was fair compared to the June 2013 Paper. However, time management remained a problem for most of us. The question that I enjoyed most was Question 2. It was about choosing 3-7 FRA, Buying March Futures contracts and buying March call options. I got 115 Ticks as the difference between March Futures price and the spot Interbank rate. However at close out there were 46 unexpired basis points. I just pray that the examiner will be lenient when marking our work so that we pass the paper
I spent a total of 2 hr 10 min on question 1! I put so much energy and time into q1 that by the time i got to the choice questions I was mentally exhausted as well as pressed for time. Ended up skimming through the choice questions but hopefully the tonnes i did in Q1 as well as the very little i did in the choice questions will be enough to take me across the finish line.
Was 3 hours sufficient for this exam???? I spent a total of 2 hr 10 min on question 1! I put so much energy and time into q1 that by the time i got to the choice questions I was mentally exhausted as well as pressed for time. Ended up skimming through the choice questions but hopefully the tonnes i did in Q1 as well as the very little i did in the choice questions will be enough to take me across the finish line.
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