Fight Finance

Question 102  option, hedging

A company runs a number of slaughterhouses which supply hamburger meat to McDonalds. The company is afraid that live cattle prices will increase over the next year, even though there is widespread belief in the market that they will be stable. What can the company do to hedge against the risk of increasing live cattle prices? Which statement(s) are correct?

(i) buy call options on live cattle.

(ii) buy put options on live cattle.

(iii) sell call options on live cattle.

Select the most correct response:

(a) Only (i) is true.

(b) Only (ii) is true.

(c) Only (iii) is true.

(d) Only (i) and (ii) is true.

(e) All statements (i), (ii) and (iii) are true.

Question 107  interest only loan

You want to buy an apartment worth $300,000. You have saved a deposit of $60,000.

The bank has agreed to lend you $240,000 as an interest only mortgage loan with a term of 30 years. The interest rate is 6% pa and is not expected to change. What will be your monthly payments?

(a) 17,435.74

(b) 1,438.92

(c) 1,414.49

(d) 1,200.00

(e) 666.67

Question 276  derivative terminology, option

The 'option strike price' in an option contract, also known as the exercise price, is paid at the start when the option contract is agreed to. or ?

Question 334  option

Which option position has the possibility of unlimited potential losses?

(a) Long call options.

(b) Short call options.

(c) Long put options.

(d) Short put options.

(e) No option positions have the possibility of unlimited potential losses.

Question 375  interest tax shield, CFFA

One formula for calculating a levered firm's free cash flow (FFCF, or CFFA) is to use net operating profit after tax (NOPAT).

###\begin{aligned} FFCF &= NOPAT + Depr - CapEx -\Delta NWC \\ &= (Rev - COGS - Depr - FC)(1-t_c) + Depr - CapEx -\Delta NWC \\ \end{aligned} \\###

Does this annual FFCF or the annual interest tax shield?

Question 568  rights issue, capital raising, capital structure

A company conducts a 1 for 5 rights issue at a subscription price of $7 when the pre-announcement stock price was $10. What is the percentage change in the stock price and the number of shares outstanding? The answers are given in the same order. Ignore all taxes, transaction costs and signalling effects.

(a) -16.67%, 20%

(b) -5%, 20%

(c) 0%, 20%

(d) 7.14%, 20%

(e) 11.67%, 0%

Question 580  price gains and returns over time, time calculation, effective rate

How many years will it take for an asset's price to quadruple (be four times as big, say from $1 to $4) if the price grows by 15% pa?

(a) 1.3685 years

(b) 3.4783 years

(c) 4.4808 years

(d) 9.919 years

(e) 11.5156 years

Question 643  future, no explanation

A trader buys one crude oil futures contract on the CME expiring in one year with a locked-in futures price of $38.94 per barrel. If the trader doesn’t close out her contract before expiry then in one year she will have the:

(a) Obligation to buy the underlying oil at $38.94 per barrel.

(b) Obligation to sell the underlying oil at $38.94 per barrel.

(c) Right to buy the underlying oil at $38.94 per barrel if she wants.

(d) Right to sell the underlying oil at $38.94 per barrel if she wants.

(e) Obligation to buy the underlying oil $38.94 per barrel if her counter party chooses to sell it.

Question 787  fixed for floating interest rate swap, intermediated swap

The below table summarises the borrowing costs confronting two companies A and B.

Bond Market Yields
	Fixed Yield to Maturity (%pa)	Floating Yield (%pa)
Firm A	2	L - 0.1
Firm B	2.5	L

 

Firm A wishes to borrow at a floating rate and Firm B wishes to borrow at a fixed rate. Design an intermediated swap (which means there will actually be two swaps) that nets a bank 0.15% and grants the remaining swap benefits to Firm A only. Which of the following statements about the swap is NOT correct?

(a) Firm A is less risky than Firm B. Firm A would have a higher credit rating.

(b) Firm A has the absolute advantage issuing bonds in both the fixed and floating coupon bond markets.

(c) Firm A has a comparative advantage issuing bonds in the floating coupon bond market.

(d) The net benefit from the swap available to Firm A is 0.25%.

(e) The swap rate between Firm B and the Bank would be 2.5% pa.

Question 815  expected and historical returns

If future required returns fall, and future expected cash flows remain the same, then prices will , or remain the ?