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phobos 12/08

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AFM Exams › phobos 12/08

  • This topic has 3 replies, 2 voices, and was last updated 6 years ago by John Moffat.
Viewing 4 posts - 1 through 4 (of 4 total)
  • Author
    Posts
  • November 26, 2018 at 11:58 am #486024
    niraj1015
    Member
    • Topics: 5
    • Replies: 4
    • ☆

    hello sir,
    In the options answer behind the kit they only used the exercise price of 94000 to calculate premium cost and gain and left out 93750 and 94250…why is that?this is the phobos question

    November 26, 2018 at 12:48 pm #486027
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54680
    • ☆☆☆☆☆

    This question was set by the previous examiner, and although the calculations in his answer are correct, he should have explained his logic in the choice of exercise price better.

    As I illustrate in my lectures, the approximate maximum effective interest rates for each of the exercise prices can be calculated as follows:

    The rate equivalent to the strike price + the premium + the extra 0.5% at which Phobos borrows.

    Using this gives:

    93.75: 6.25% + 0.045% + 0.5% = 6.795%
    94.00: 6% + 0.168% + 0.5% = 6.668%
    94.25: 5.75% + 0.3% + 0.5% = 6.55%

    Given that the treasurer wishes to keep the maximum borrowing rate at or below 6.6%, I would have chosen 94.25 as the exercise price. (The exact effective rate will obviously be a little different because of basis risk.) Provided that I explained my logic in choosing this, then it would get full marks.

    The examiner chose 94.00 as the exercise price, but this does go over the limit of 6.6%. As you can see from the examiners answer, the exact maximum turns out to be 6.63%. The one factor that could make it a better choice despite this, is that if the option ends up not being exercised then the premium will still have to be paid and is a lot lower at 94:00 that at 94.25.

    Fortunately the current examiner does not suffer from the same problems as the previous examiner 🙂

    November 26, 2018 at 4:22 pm #486038
    niraj1015
    Member
    • Topics: 5
    • Replies: 4
    • ☆

    thanks alot

    November 27, 2018 at 8:13 am #486089
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54680
    • ☆☆☆☆☆

    You are welcome 🙂

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    Posts
Viewing 4 posts - 1 through 4 (of 4 total)
  • The topic ‘phobos 12/08’ is closed to new replies.

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