Question 246 foreign exchange rate, forward foreign exchange rate, cross currency interest rate parity
Suppose the Australian cash rate is expected to be 8.15% pa and the US federal funds rate is expected to be 3.00% pa over the next 2 years, both given as nominal effective annual rates. The current exchange rate is at parity, so 1 USD = 1 AUD.
What is the implied 2 year forward foreign exchange rate?
Which of the following statements about book and market equity is NOT correct?
A firm is considering a business project which costs $10m now and is expected to pay a single cash flow of $12.1m in two years.
Assume that the initial $10m cost is funded using the firm's existing cash so no new equity or debt will be raised. The cost of capital is 10% pa.
Which of the following statements about net present value (NPV), internal rate of return (IRR) and payback period is NOT correct?
A company advertises an investment costing $1,000 which they say is underpriced. They say that it has an expected total return of 15% pa, but a required return of only 10% pa. Of the 15% pa total expected return, the dividend yield is expected to always be 7% pa and rest is the capital yield.
Assuming that the company's statements are correct, what is the NPV of buying the investment if the 15% total return lasts for the next 100 years (t=0 to 100), then reverts to 10% after that time? Also, what is the NPV of the investment if the 15% return lasts forever?
In both cases, assume that the required return of 10% remains constant, the dividends can only be re-invested at 10% pa and all returns are given as effective annual rates.
The answer choices below are given in the same order (15% for 100 years, and 15% forever):
Question 701 utility, risk aversion, utility function, gamble
Mr Blue, Miss Red and Mrs Green are people with different utility functions.
Each person has $50 of initial wealth. A coin toss game is offered to each person at a casino where the player can win or lose $50. Each player can flip a coin and if they flip heads, they receive $50. If they flip tails then they will lose $50. Which of the following statements is NOT correct?
Itau Unibanco is a major listed bank in Brazil with a market capitalisation of equity equal to BRL 85.744 billion, EPS of BRL 3.96 and 2.97 billion shares on issue.
Banco Bradesco is another major bank with total earnings of BRL 8.77 billion and 2.52 billion shares on issue.
Estimate Banco Bradesco's current share price using a price-earnings multiples approach assuming that Itau Unibanco is a comparable firm.
Note that BRL is the Brazilian Real, their currency. Figures sourced from Google Finance on the market close of the BVMF on 24 July 2015.
Which derivatives position has the possibility of unlimited potential gains?
A company has a 95% daily Value at Risk (VaR) of $1 million. The units of this VaR are in:
| Major City Apartment Prices | |||
| One bedroom, one bathroom, around 55 square metre floor space, Dec 2018 | |||
| City | Advertised price | Currency | FX quote |
| London, Great Britain | 995,500 | GBP | 1.3 USD per GBP |
| Paris, France | 639,000 | EUR | 0.88 USD per EUR |
| San Francisco, USA | 859,000 | USD | 1 USD per USD |
| Shanghai, China | 6,300,000 | RMB | 6.9 RMB per USD |
| Sydney, Australia | 670,000 | AUD | 0.72 USD per AUD |
| Tokyo, Japan | 50,800,000 | JPY | 112 JPY per USD |
Which city has the most expensive apartment, measured in United States Dollars (USD)? Pay attention to the FX quotes.
Question 993 inflation, real and nominal returns and cash flows
In February 2020, the RBA cash rate was 0.75% pa and the Australian CPI inflation rate was 1.8% pa.
You currently have $100 in the bank which pays a 0.75% pa interest rate.
Apples currently cost $1 each at the shop and inflation is 1.8% pa which is the expected growth rate in the apple price.
This information is summarised in the table below, with some parts missing that correspond to the answer options. All rates are given as effective annual rates. Note that when payments are not specified as real, as in this question, they're conventionally assumed to be nominal.
| Wealth in Dollars and Apples | ||||
| Time (year) | Bank account wealth ($) | Apple price ($) | Wealth in apples | |
| 0 | 100 | 1 | 100 | |
| 1 | 100.75 | 1.018 | (a) | |
| 2 | (b) | (c) | (d) | |
Which of the following statements is NOT correct? Your: