*** P4 June 2016 Exam was.. Instant Poll and comments ***

wait we need to add 0.5% for FRA, I thought FRA is the final rate that we are given by the bank?

I got the same for the FRA and Futures (forgot the 0.5% at the beginning for FRA. Only realised when the futures was so much higher!).
For the options, the rate increase war something like 4.9% with an exercised option. For the rate decrease it was the borrowing rate + the option premium, so something like 4.4%.

It meant that forward > future at either case.
forward > option when rates go up (by around 0.2%)
option > forward when rates go down (by around 0.3%).

For some reason, this seemed wrong when I did it.
I’m feeling much better now that other people got it. Lets hope we aren’t all systematically wrong.

what about Var who remembers? I just calculated Var at 95% and commented. what about you ?

there was given all equity financed rat and also borrowing rate actual was 5%, so I discounted financing side effects using this rate Annuity factor for 4 year at 5%.

Finance effect cant be annuity because it has to be translated into USD first at different exchange rates before discounting so will result in different cashflows each year

I also assume that the project is wholly equity financed .. and did you convert the real rate in nominal ?

can anyone tell me how VAR was calculated? question wanted it at 95% confidence level which is 5% probability.

and half people are saying Q1 was APV (bcs of subsidised loan, specific project’s financial appraisal and ungeared Ke) and half Int’l Investment Appraisal (bcs of tax rates, tax treaty, exchange rates stuff). what was it actually?

in Q2 FRAs seemed better in all cases

For 2) The future it was 4.40 plus 0.50 less the gain on the futures which was 0.30 i believe so the rate would have been 4.60 and then wen rates went down you wud have made a loss on the futures.

FRA gives the most beneficial rate if interest rate rises, but if they fall than option will give the best outcome. I also mentioned that FRA has credit risk. And if the company is happy with it and thinks about to protect against unfavorable outcome than FRA should use. If unhappy with credit risk than futures.
And if wants to benefit from IR decline than options, but premium need to be paid in case of options.
Also I stated that we assumed no basis risk, no transaction costs, no margin to be paid. So before taking final decision take these into account.

Fair exam set. Of course not fair time-wise, as usual, but fair to gain a pass.

In my personal opinion, the 15 minutes reading time should always be spent solving the first question, specially when you see numerical like NPV calculation.

I found the first question on NPV a bit tricky but I had decided that I will not let the feeling of “Where am I going wrong?” ruin the exam. Once you set the plan of solving the answer in your 15 mins time, I believe, you should just keep moving. The important part is to attempt as much as you can as you race with time.

Hoping everyone the best

Guys,

Do you actually calculate gearing based on Market value of equity instead of book value? (Q3C)

Oh gawd, just when i thought there is hope for a borderline 50, now its guaranteed fail T.T

And for Q1, I sulk big time on the timing of funds for the capital expenditure, i ended up with Y0 and Y2 instead of Y0 and Y1.

spent 15 mins rap time for q1
spent 2 hours full doing q1
i only had 1 hour left and 2 questions to do
spent 45 mins doing q2
15 mins left no time to read the whole scenario so just wrote benefits and drawbacks of acquisition
overall, q1 & q2 were straightforward and should be easy for many but q1 was extremly time pressured, struggled to do apv calculation right
q2 time was already running low so had to amend the answers again and again, first thought no need to add 0.5 but later realised we need to..futures gave fav. result than FRA (i am afraid if it is right), options if int rate decrease would have the lowest cost
q3 had not time so could not produce calculations but requirements were not straightforward i guess

i am thinking i would marginally fail so sad, thinking to switch to p5 if i fail this time

Did anyone manage the VaR question? It asked the confidence interval for the final outcome not to be negative, which means we first had to find the probability of the outcome being between 0 and the mean of 6.5. With a std. deviation of 1.3, the std. variable is

z = (x-m)/s =(0-6.5)/1.3 = 5

However, the Tables provided in the exam stop at std. variable 3!. Does anyone have a solution for this?