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Question 458  capital budgeting, no explanation

Which of the following is NOT a valid method to estimate future revenues or costs in a pro-forma income statement when trying to value a company?



Question 500  NPV, IRR

The below graph shows a project's net present value (NPV) against its annual discount rate.

For what discount rate or range of discount rates would you accept and commence the project?

All answer choices are given as approximations from reading off the graph.



Question 508  income and capital returns

Which of the following equations is NOT equal to the total return of an asset?

Let ##p_0## be the current price, ##p_1## the expected price in one year and ##c_1## the expected income in one year.



Question 513  stock split, reverse stock split, stock dividend, bonus issue, rights issue

Which of the following statements is NOT correct?



Question 605  cross currency interest rate parity, foreign exchange rate

If the Reserve Bank of Australia is expected to keep its interbank overnight cash rate at 2% pa while the US Federal Reserve is expected to keep its federal funds rate at 0% pa over the next year, is the AUD is expected to , , or remain against the USD over the next year?


Question 648  margin call, future

A trader buys a one year futures contract on crude oil. The contract is for the delivery of 1,000 barrels. The current futures price is $38.94 per barrel. The initial margin is $3,410 per contract, and the maintenance margin is $3,100 per contract.

What is the smallest price change that would lead to a margin call for the buyer?



Question 712  effective rate conversion

An effective monthly return of 1% ##(r_\text{eff monthly})## is equivalent to an effective annual return ##(r_\text{eff annual})## of:



Question 825  future, hedging, tailing the hedge, speculation, no explanation

An equity index fund manager controls a USD500 million diversified equity portfolio with a beta of 0.9. The equity manager expects a significant rally in equity prices next year. The market does not think that this will happen. If the fund manager wishes to increase his portfolio beta to 1.5, how many S&P500 futures should he buy?

The US market equity index is the S&P500. One year CME futures on the S&P500 currently trade at 2,155 points and the spot price is 2,180 points. Each point is worth $250.

The number of one year S&P500 futures contracts that the fund manager should buy is:



Question 933  confidence interval, normal distribution

A stock has an expected return of 10% pa and you're 90% sure that over the next year, the return will be between -15% and 35%. The stock's returns are normally distributed. Note that the Z-statistic corresponding to a one-tail:

  • 90% normal probability density function is 1.282.
  • 95% normal probability density function is 1.645.
  • 97.5% normal probability density function is 1.960.

What is the stock’s standard deviation of returns in percentage points per annum (pp pa)?



Question 956  option, Black-Scholes-Merton option pricing, delta hedging, hedging

A bank sells a European call option on a non-dividend paying stock and delta hedges on a daily basis. Below is the result of their hedging, with columns representing consecutive days. Assume that there are 365 days per year and interest is paid daily in arrears.

Delta Hedging a Short Call using Stocks and Debt
 
Description Symbol Days to maturity (T in days)
    60 59 58 57 56 55
Spot price ($) S 10000 10125 9800 9675 10000 10000
Strike price ($) K 10000 10000 10000 10000 10000 10000
Risk free cont. comp. rate (pa) r 0.05 0.05 0.05 0.05 0.05 0.05
Standard deviation of the stock's cont. comp. returns (pa) σ 0.4 0.4 0.4 0.4 0.4 0.4
Option maturity (years) T 0.164384 0.161644 0.158904 0.156164 0.153425 0.150685
Delta N[d1] = dc/dS 0.552416 0.582351 0.501138 0.467885 0.550649 0.550197
Probability that S > K at maturity in risk neutral world N[d2] 0.487871 0.51878 0.437781 0.405685 0.488282 0.488387
Call option price ($) c 685.391158 750.26411 567.990995 501.487157 660.982878 ?
Stock investment value ($) N[d1]*S 5524.164129 5896.301781 4911.152036 4526.788065 5506.488143 ?
Borrowing which partly funds stock investment ($) N[d2]*K/e^(r*T) 4838.772971 5146.037671 4343.161041 4025.300909 4845.505265 ?
Interest expense from borrowing paid in arrears ($) r*N[d2]*K/e^(r*T) 0.662891 0.704985 0.594994 0.551449 ?
Gain on stock ($) N[d1]*(SNew - SOld) 69.052052 -189.264008 -62.642245 152.062648 ?
Gain on short call option ($) -1*(cNew - cOld) -64.872952 182.273114 66.503839 -159.495721 ?
Net gain ($) Gains - InterestExpense 3.516209 -7.695878 3.266599 -7.984522 ?
 
Gamma Γ = d^2c/dS^2 0.000244 0.00024 0.000255 0.00026 0.000253 0.000255
Theta θ = dc/dT 2196.873429 2227.881353 2182.174706 2151.539751 2266.589184 2285.1895
 

 

In the last column when there are 55 days left to maturity there are missing values. Which of the following statements about those missing values is NOT correct?