[09:51:02] --------------------------Home-------------------------[09:51:28] --------------------------Paper P4-------------------------[09:51:38] dongbula: ok
[09:52:14] pixel: {Esther} hello lady
[09:53:01] dongbula: is this better?
[09:53:09] pixel: {dongbula} yeah
[09:53:17] Esther: {pixel} {pixel} hi how are you doing
[09:53:42] pixel: {Esther} m fine to say it formally
[09:53:45] pixel: u tel
[09:53:53] pixel: hows it going
[09:54:16] Esther: {dongbula} you should change to a colour that is outstanding to the others is knid
blending with the black
[09:54:40] hamza.bhoy: hey frndss
[09:54:40] Esther: {pixel} I hear you bro keep it up
[09:54:56] Esther: well i will try to get there by thursday
[09:55:02] Esther: {hamza.bhoy} hi
[09:55:23] hamza.bhoy: hws p4 getting alongg?
[09:55:39] pixel: {Esther} aahan that will be good if u do
[09:55:48] pixel: coz i think i might get late
[09:55:48] pixel: :S
[09:56:00] Esther: {pixel} lol
[09:56:10] Esther: well we all have to try ok
[09:56:44] pixel: yeah thats something which cannot be denied
[09:56:46] pixel: :a
[09:57:04] dongbula: I 'm confused when caculate the capital allance, some answers of questions the
afer tax realisable value of investments have been deducted for the WDV to caculate the balancing
allawance/charge, but sometimes they don't caculate the balancing allawance/charge at all. what's the
approperate way ?
[09:57:36] pixel: its as per the question
[09:58:09] hamza.bhoy: well
[09:58:37] hamza.bhoy: when balancing allowance has been calculated as per question u dont hav 2 do
it agen
[09:58:49] hamza.bhoy: 2. when residual value is given
[09:59:37] hamza.bhoy: right pixel?
[09:59:58] pixel: yeah pretty much
[10:00:12] pixel: {dongbula} did u get it
[10:00:31] pixel: chk the question and go as it asks u to
[10:01:09] pixel: well i had a question too
[10:01:17] pixel: if some one would like to answer
[10:01:43] hamza.bhoy: hmm
[10:01:54] pixel: IRP calculation
[10:02:08] hamza.bhoy: mirr?
[10:02:17] pixel: IRP!!!
[10:02:18] dongbula: thank you guys!
[10:02:20] pixel: not MIRR
[10:02:47] pixel: for the calculation of forward rates
[10:02:59] pixel: u familiar with it ?
[10:03:57] pixel: lets then save it till the tutor is here
[10:03:59] pixel: :s
[10:04:37] Esther: {pixel} lets talkabout it
[10:04:52] Esther: the foward hedge
[10:04:58] pixel: its damn confusing
[10:05:17] pixel: did u do the question SYDONICS
[10:05:21] pixel: from the pilot paper
[10:05:22] pixel: ?
[10:05:30] Esther: yes i will tell you why, see when doing questions you realise
[10:05:41] Esther: ok let me see name sounds familar
[10:06:32] pixel: we use first currency interest rate divided by second currenys interest rate in IRP
formulea
[10:06:40] pixel: do u agree with that
[10:06:53] Esther: wait'
[10:07:16] hamza.bhoy: oh yeaa
[10:07:25] hamza.bhoy: real to nominal conversionn
[10:07:28] hamza.bhoy: srry gt dc
[10:07:42] pixel: {hamza.bhoy} nops thats fisher
[10:07:50] hamza.bhoy: yepp
[10:07:54] Esther: ok pixel lets go
[10:08:05] pixel: u have his answer with u too
[10:08:08] pixel: right
[10:08:20] hamza.bhoy: which one are u tokin abtt?
[10:08:43] Esther: so we need150euro in three month time right
[10:08:46] hamza.bhoy: 1+ib/1+ic?
[10:08:58] Esther: {hamza.bhoy} synonics pilot paper
[10:09:03] hamza.bhoy: ok
[10:09:05] hamza.bhoy: lemme see
[10:09:18] Esther: yes i do its BPP duh
[10:09:23] pixel: {Esther} just tlme how did he calculate that forward rate
[10:09:43] pixel: whats the logic
[10:10:09] hamza.bhoy: thts on an average monthly basis
[10:10:09] pixel: normally as i said forward rate is calulated as first currency interest rate divided by
second currenys interest rate in IRP formulea
[10:10:13] hamza.bhoy: lemme see
[10:11:05] Esther: {pixel} let me read it again ok
[10:11:16] pixel: {Esther} this is what i used in all investmetn appraisal questions too
[10:11:35] pixel: but this particular question is out of the odd
[10:11:40] pixel: n it got on my nerves
[10:11:41] pixel: :s
[10:12:42] Esther: I only figured out something the other day with how the rates are quoted
[10:13:23] Esther: it have the direct method which is you are a UK comp.. and the rate is STR/ Euro
[10:13:26] pixel: yeah the direct qoute as they prefer
[10:13:47] pixel: {Esther} yeah explain it
[10:13:47] Esther: and then the indirect
[10:13:58] Esther: ok
[10:14:35] Esther: with the direct we say bank rates are quoted in our currency agree
[10:14:50] pixel: yups
[10:15:06] Esther: so 1 of the foreign currecy is qual to what our rate is
[10:15:10] Esther: for e.g
[10:15:17] Esther: STR/Euro
[10:15:35] pixel: so how to calulate the forward rate
[10:15:42] Esther: 1.9 - 2.1
[10:16:06] Esther: so 1.9 str is = to one euro
[10:16:20] pixel: agreed
[10:16:30] Esther: the other thing to note the 1.9 is sell and the 2.1 is buy rate
[10:17:00] Esther: so depending on what we need to do for e.g if we need to payment in euro
[10:17:21] Esther: this is my way duh ok they are alot of ways to skin a cat
[10:17:46] pixel: yeah
[10:18:01] pixel: but how to convert it to a forward rate
[10:18:09] Esther: so do you agree that we need payment say in three months and the rate we quote is
three month agree
[10:18:30] pixel: i think it was 0.69 euro / pound
[10:18:46] Esther: ok let me see
[10:18:58] pixel: how did he get that o.6932 in the answer
[10:19:28] Esther: wait i am not doing that yet
[10:19:41] Esther: i want us to understand what the concept are
[10:19:44] Esther: good
[10:19:45] pixel: it was supposed to be .6868 something according to the normal IRP formulea which
uses first currency interest rate divided by second currenys interest rate in IRP formulea
[10:20:07] Esther: so we need in three month time say 200 Euro
[10:20:17] Esther: using the same rate ok
[10:20:53] Esther: so i am sayin gto you using the direct method we need to do three things because the
rate is quoted in our currecny
[10:22:26] Esther: 1.so we buy Euro because in 3 months we need to get euro, 2. then if we buy euro
we need to sell our STR to get Euros,3. ie the bank buys Str
[10:22:46] Esther: let me know if you grasp that there
[10:23:18] Esther: wait i said it wrong
[10:23:22] Esther: ignore that pls
[10:23:32] Esther: my bad i am now reading it sorry
[10:23:37] Esther: ignore that ok
[10:23:44] Esther: so we here we go now
[10:25:33] Esther: we need 200 euro in 3 months so we need to buy euroby selling STR and the bank
buy STR so our answer will be 200x2.1= 420 STR
[10:25:43] --------------------------Home-------------------------[10:25:50] --------------------------Paper P4-------------------------[10:26:04] Esther: where is Pixel
[10:27:20] hamza.bhoy: left
[10:27:21] hamza.bhoy: lolol
[10:27:28] danidott4e: loll.......im following
[10:27:37] hamza.bhoy: brb
[10:27:42] hamza.bhoy: n then ill xplainn
[10:27:51] hamza.bhoy: u dint get his question btw
[10:27:56] hamza.bhoy: dnt mind it
[10:34:47] geeta: hey
[10:34:53] geeta: {Esther}
[10:37:46] waqasshahzada: frds howss gng prep?
[10:38:11] geeta: danitotte
[10:38:17] geeta: sure
[10:38:23] danidott4e: {geeta} hey hey
[10:38:36] geeta: {danidott4e} what u up to today
[10:39:04] danidott4e: hedging girl....pressure
[10:39:18] geeta: {danidott4e} ok, enjoy the pressure
[10:39:45] geeta: {danidott4e} just think 64.....lol...... that is the remedy
[10:39:49] danidott4e: hehe...what u up 2
[10:40:02] geeta: i am just confused and stressed with so much to do
[10:40:05] danidott4e: yes...its constantly in my thoughts....
[10:40:06] geeta: still deciding
[10:40:06] Esther: {danidott4e} like she's having fun of you or us lol
[10:40:33] geeta: {Esther} na, i am just a bit humour
[10:40:34] danidott4e: yeah...she thinks im mentally disturbed....hehe
[10:40:42] Esther: well you aiming very high i will take 50
[10:40:43] geeta: {danidott4e} hey, no
[10:40:48] Esther: lol
[10:40:53] danidott4e: {geeta} kid...
[10:40:57] danidott4e: aim for the sky
[10:41:00] geeta: lol
[10:41:15] trinistudent001: hello everyone
[10:41:23] geeta: {danidott4e} immagine family came over today
[10:41:24] geeta: lol
[10:41:28] trinistudent001: how can I change the colour of my font here?
[10:41:42] Esther: {trinistudent001} change colour
[10:41:44] geeta: i cant believe that, like corpus christi is not a day to visit family
[10:41:55] danidott4e: wow.....what a time heheheh,....i know the feeling
[10:41:56] geeta: they should plant something home
[10:42:00] danidott4e: loll
[10:42:15] Esther: lol
[10:42:15] geeta: and to top it off i had to make a big huge lunch
[10:42:35] geeta: at least i have lunch now......lol
[10:42:59] danidott4e: hmmmm.....loll....well hopefully u werent be distracted for the rest of the day
[10:43:13] Esther: i would have run them
[10:43:18] danidott4e: loll
[10:43:19] trinistudent001: hi everybody....
[10:43:23] geeta: {Esther} u too bad and sweet
[10:43:26] Esther: {trinistudent001} hi how are you
[10:43:27] geeta: {trinistudent001} hi
[10:43:40] Esther: run them hello lol
[10:43:42] danidott4e: {trinistudent001} hey
[10:43:44] trinistudent001: i'm good.....Geeta you sound like a Trini :)
[10:43:48] geeta: {trinistudent001} we can now see what u were saying
[10:44:02] Esther: actually the house if full of rtinig
[10:44:06] Esther: trini's
[10:44:08] geeta: {geeta} lol, i am
[10:44:25] trinistudent001: great! by chance you from South?
[10:44:31] geeta: yes
[10:44:32] Esther: true
[10:44:35] geeta: {trinistudent001} you
[10:44:47] Esther: what a way to meed lol
[10:45:23] geeta: ok guys
[10:45:39] geeta: lets get down to some p4
[10:46:21] Esther: do you all have question for the tutor, you should be prepared
[10:46:54] Esther: so when he get here is questions like that but know not to talk another person is
asking a question lets go with some order ok
[10:47:01] geeta: {Esther} yes i want to find out why add a .0 to that N(d1)
[10:47:50] Esther: good question but just know that is just a rule that needs to be followed try not to
read too much into it
[10:47:58] geeta: lol
[10:48:28] geeta: ok, but even in the std dev sheet, there is nothing like that
[10:48:45] Esther: yes the not in the buttom
[10:48:56] trinistudent001: yes, I am
[10:49:03] geeta: {trinistudent001} where>
[10:49:44] Esther: look at the recent exams paper and see its at the buttom at the SD table
[10:50:56] geeta: {Esther} no there is nothing that says that
[10:51:01] trinistudent001: Pleasantville....i had a long lost school friend named Geeta.....sorry for
digressing Esther
[10:51:05] geeta: {trinistudent001} so u too classes?
[10:51:15] geeta: {trinistudent001} took*
[10:51:16] trinistudent001: which question are we talking about?
[10:51:28] trinistudent001: i did last sitting.....self study this time around
[10:51:33] geeta: ok
[10:51:36] geeta: this is what
[10:51:38] trinistudent001: heard about PASS Ltd too late
[10:51:43] trinistudent001: P4 and P5
[10:51:48] Esther: ok
[10:51:56] Esther: i heard they are good too
[10:52:03] geeta: using the black schloles model
[10:52:12] geeta: {trinistudent001} since u toook classes
[10:52:26] trinistudent001: ok
[10:52:28] geeta: {trinistudent001} when finding n(di)
[10:52:42] geeta: when we use the std deviation table
[10:52:49] trinistudent001: i've been seeing them talking about the Grabbe version of the BS,
[10:52:52] trinistudent001: BSM
[10:54:00] trinistudent001: oh....ok....when you find d1, you use the normal distribution table to find
the factor to being either added to or subtracted from 0.5
[10:54:00] geeta: {trinistudent001} lets just say we get a figure like 1.46
[10:54:29] geeta: using the std deviation table that would be equivalent to 0.4279 right?
[10:54:43] geeta: and then we add .5 to it since its positive?
[10:54:48] trinistudent001: yes, correct
[10:55:07] geeta: or do we add a zero to it like .04279 and then add .5 to it?
[10:55:36] danidott4e: no.....i never knew that....its supp to be .5 to the actual z value
[10:55:58] geeta: ok
[10:56:14] trinistudent001: no, whatever result you get from the tables is what you use and added 0.5 if
its positive, or subtracted 0.5 if its negative
[10:56:20] geeta: {danidott4e} {trinistudent001} that is what i believe too
[10:56:37] danidott4e: where was it different
[10:56:38] danidott4e: ?
[10:56:59] trinistudent001: {danidott4e} nowhere, as far as I know
[10:57:15] geeta: ok
[10:58:10] trinistudent001: yes, the z values are on the normal distrib tables
[10:58:15] admin: P4 Session will start soon! get your questions ready :)
[10:58:22] trinistudent001: thanks
[10:58:37] geeta: {admin} ok thank u
[10:59:09] --------------------------Home-------------------------[10:59:21] --------------------------Paper P4-------------------------[11:01:11] johnmoffat: hi
[11:01:15] Esther: hi sir
[11:01:31] harmony23: hello
[11:02:00] johnmoffat: so....any questions :)
[11:02:09] Esther: ok we jsut need clarity with the SD table when to add and when to minus
[11:02:26] krishna42: hello sir
[11:02:53] johnmoffat: if d1 is positive then you add the figure from the tables to 0.5....
[11:03:05] trinistudent001: {johnmoffat} hi
[11:03:13] hamza.bhoy: {johnmoffat} hello sir
[11:03:34] geeta: {johnmoffat} is it the same rules under in the table?
[11:03:40] johnmoffat: ....if it is negative then you subtract the figure in the tables from 0.5 (note...you
do not subtract 0.5 from the figure - you subtract the figure from 0.5)
[11:03:42] geeta: {johnmoffat} and nothing more?
[11:03:47] Esther: also do we add a 0 infront of the SD number on the table like say forinstance i have
d1 and 1.465 and in the SD table i have .04279
[11:03:58] harmony23: wen do we use nominal rates and wen real rate?
[11:04:13] geeta: {harmony23} we going in order here boy
[11:05:07] johnmoffat: {Esther} No - you do not put 0 in front. If you have d = 1.46, then from the tables
you have 0.4279
[11:05:26] Esther: ok thanks for clearing the air
[11:05:32] geeta: {johnmoffat} thanks sir
[11:05:38] johnmoffat: so...you either add to 0.5 and get 0.9279, or you subtract from 0.5 and get
0.0721
[11:05:48] Esther: ok kool
[11:05:57] geeta: {harmony23} ok shoot......... now is ur turn
[11:06:01] trinistudent001: {johnmoffat} sir, i'm concerned about the use of the Grabbe version of the
BSM....is there any change in the general method of calculation using this version
[11:06:22] johnmoffat: {harmony23} nominal rate is actual cost of capital and you use this when you
have the actual cash flows (so when you have added any inflation to get the actual cash flows)
[11:06:27] trinistudent001: {geeta} sorry.....didnt see it was harmony's turn
[11:06:42] Esther: lol
[11:06:45] Esther: sorry
[11:06:55] johnmoffat: The real rate is the cost of capital without inflation and you use this on the
current price cash flows (that is the cash flows without adding on any inflation)
[11:06:56] geeta: lol
[11:07:12] harmony23: ok thnx
[11:07:39] danidott4e: Sir....can you briefly explain Modigliani Theory...
[11:07:48] geeta: {johnmoffat} ok
[11:07:56] johnmoffat: {trinistudent001} No - you use the tables etc in the normal way. However the
formula given in the tables is really a simplified version and Bob Ryan said he would write an article
before asking it. He hasnt written an article!
[11:07:58] Esther: good order here
[11:08:09] geeta: {danidott4e} its trini student now
[11:08:24] Esther: {johnmoffat} good
[11:08:45] geeta: {johnmoffat} this is such a good explanation
[11:08:53] geeta: i am making that note now
[11:08:54] johnmoffat: {danidott4e} MM came up with a formula for how the cost of equity would
change with more gearing (more gearing means more risk for shareholders so a higher cost of
equity).......
[11:08:57] Esther: {johnmoffat} {geeta} :)
[11:09:15] trinistudent001: {johnmoffat} the only article he wrote was the one he wrote last
year....thanks sir
[11:09:48] geeta: {trinistudent001} yes last year the article was written
[11:09:53] johnmoffat: .....they then found that without tax, the WACC would stay constant for any level
of gearing (equity is higher cost but this is offset by having more cheap debt)....
[11:10:13] jmaesjack: M&M suggest Diversify portfolio to lower down cost of capital, balance out
between Borrowing and Capital Input Benefit of both, rite. find the lowest cost averaged out.
[11:10:43] johnmoffat: ....however when they brought in tax, the WACC will fall with higher gearing
because debt interest gets tax relief. So...the more debt borrowing the better, but only because of the
tax relief on the interest.
[11:11:06] geeta: {johnmoffat} late last year, so would u believe its coming this exam?
[11:11:12] Esther: next question guys
[11:11:26] trinistudent001: {johnmoffat} I have a problem with currency options
[11:11:31] danidott4e: {johnmoffat} thanks
[11:12:08] johnmoffat: {trinistudent001} whats the problem
[11:12:21] trinistudent001: {johnmoffat} for some reason I cannot figure out how the examine gets the
call strike price and put strike price as in the case of Troder Inc. (Q46 BPP)
[11:12:30] Esther: {trinistudent001} currency you have to learn the steps and try to work a few
questions and you see how it works
[11:13:08] johnmoffat: {geeta} the article was not on the Grabbe variant - it was on normal option
pricing
[11:13:16] jmaesjack: True, tricky question asking for swaps in PYQ.
[11:13:19] trinistudent001: {Esther} the steps arent really the problem, its just that particular area with
the collar
[11:14:19] Esther: {johnmoffat} can you explain the collar for us please
[11:14:44] johnmoffat: {trinistudent001} which edition are you using? It is not Q46 in the current
edition
[11:14:58] trinistudent001: {geeta} yes, Dec 2009 Q3 asked about BSM
[11:15:07] geeta: {johnmoffat} ok thanks
[11:15:10] trinistudent001: {johnmoffat} 2009 edition
[11:15:42] johnmoffat: {trinistudent001} I have found the question
[11:16:03] trinistudent001: {johnmoffat} ok
[11:16:21] Esther: {johnmoffat} with the currency options how do we what what excercise price to use
like if we have put and call?
[11:16:27] jmaesjack: Cap and Floor made available for subscriber to minimise the risk exposure and
cost of options, make collar used in handy.
[11:16:40] johnmoffat: You can buy an option at any of the strike prices in the table - the examiner uses
different strikes to illustrate. There is no 'special' way of getting a strike price. I will explain a collar.
[11:17:01] Esther: {johnmoffat} ok
[11:17:33] johnmoffat: If you are borrowing money, then buying a put option will limit the maximum
interest you will pay (to the equivalent of the strike). However the downside is that it costs money (the
premium).....
[11:18:05] Esther: {johnmoffat} right
[11:18:06] johnmoffat: Similarly, if you are depositing money buying a call option will limit the minimum
interest rate, but again there is a premium.......
[11:18:13] trinistudent001: {johnmoffat} ok good so far
[11:18:45] Esther: {johnmoffat} good
[11:19:22] trinistudent001: {johnmoffat} but still in this particular question what did he use to get the
strike prices, I tried all sorts of ways and I couldnt get it
[11:19:23] johnmoffat: Well back to a borrower.........he buys a put and limits the maximum rate, but
has the cost of the premium. To reduce the net cost he can also sell a call option - he will receive a
premium (and so the net cost is lower), but then limits the minimum interest rate he will pay.
[11:20:13] johnmoffat: So provided that he is prepared to accept a minimum as well as a maximum
interest rate, the net cost is reduced. Having a max and a min is a collar.
[11:21:24] geeta: {johnmoffat} so its like they the sort of netted against each other
[11:21:32] johnmoffat: {trinistudent001} If you look at the table in the question, the strike prices
available are 95.25, 95.50, and 95.75. (I know it is typed funny but it is common to leave out the 'point'
and type 95.25 as 05250.
[11:21:34] trinistudent001: {johnmoffat} the caps and the floors (maximum and minimum
respectively)...got it
[11:22:54] johnmoffat: So....you can use any combination of strike prices to illustrate. For example, a
put at 95.25 is limiting the max interest rate to 4.75% and selling a call at 95.75 is limiting the minimum
interest rate to 4.25%.
[11:24:28] trinistudent001: {johnmoffat} ok.....so its simply the way the futures prices are found then
[11:25:26] jmaesjack: future price estimate to be exact.
[11:25:44] johnmoffat: {jmaesjack} It is not an estimate of anything!
[11:25:56] succeed4me: i have a question regarding Tayquer plc collars caps n floors
[11:25:57] muheebah: where can i view the live the live chat
[11:26:25] Esther: {muheebah} it will be posted on fuorum
[11:26:28] jmaesjack: future price do influence by economic factor .. or change of policy rite?
[11:26:48] johnmoffat: {trinistudent001} The option is the write to sell (put) or buy (call) futures at a
fixed price (the strike) on a future date. The price of futures will change as interest rates change.
[11:27:09] trinistudent001: {johnmoffat} yes, I understand that
[11:27:24] hamza.bhoy: what is the tick size?
[11:27:26] johnmoffat: {jmaesjack} Neither - the price of futures changes as interest rates change. A
futures price of 95.00 is equivalent to an interest rate of 5% (100-95).
[11:27:46] jmaesjack: okay.. now i clear.
[11:28:06] johnmoffat: {hamza.bhoy} A tick is the smallest movement there can be in a futures price.
For interest rate futures it is 0.01 (equivalent to 0.01%)
[11:28:11] Esther: {johnmoffat} my question now
[11:28:21] geeta: and then me
[11:28:22] geeta: lol
[11:28:26] hamza.bhoy: lol
[11:28:29] Esther: {johnmoffat} or that must be lost lol
[11:28:42] johnmoffat: {hamza.bhoy} However I never bother using ticks in exam questions to be
honest. It just makes more work and you have never actually needed to use them.
[11:28:42] trinistudent001: {geeta} {Esther} sorry ladies
[11:28:55] johnmoffat: {Esther} Ooops - sorry. Did I miss your question?
[11:29:01] Esther: I know lol
[11:29:10] hamza.bhoy: okk
[11:29:13] johnmoffat: :)
[11:29:19] geeta: {Esther} go girl
[11:29:20] geeta: lol
[11:29:25] Esther: i was asking about the options for chosing the excerise price to use?
[11:29:34] Esther: is it the closet to the spot?
[11:30:02] succeed4me: the answe r was saying that for eg if interest rate rose to 9% and the put option
had been sold at 9150 exercise price the buyer of the put option would exercise the option at any future
price LOWER than 9150 can u explain what they mean plz
[11:30:30] geeta: {Esther}yes, closest to spot to closest to the date of excercise, good question
[11:30:34] johnmoffat: {Esther} No. Do you want me to explain using interest rate options or foregn
exchange options (the principle is the same whichever you choose)
[11:30:44] johnmoffat: {succeed4me} One second - I will finish with Esther first
[11:30:53] succeed4me: ok thanx
[11:31:55] johnmoffat: I will explain using for curr options. Suppose spot at the moment is $/GBP 1.50
and you are going to pay dollars.
[11:31:56] Esther: {johnmoffat} is it different fo rthe two
[11:32:24] geeta: {johnmoffat} ok after succeed question, can u explain the term quantitative easing?
[11:32:39] johnmoffat: You are expecting the exch rate to fall, which is good for you cos you are paying
money, but you might be wrong and the rate might increase.
[11:32:54] Esther: {johnmoffat} yes
[11:33:03] Esther: {johnmoffat} agree
[11:33:20] johnmoffat: So.....to 'insure' yourself you buy an option - that will fix the maximum exch rate
you will have (because if the exch rate is lower you will not use the option).
[11:33:59] trinistudent001: {johnmoffat} and you wont lose except that it is not exercised, the option
premium is paid immediately
[11:34:08] trinistudent001: {johnmoffat} am I correct?
[11:34:25] johnmoffat: The company has to decide what they max they are prepared to accept it maybe they are prepared to accept an exch rate of up to 1.55, but no higher. In which case they would
be after an option with a strike of 1.55.
[11:34:52] Esther: {johnmoffat} ok
[11:35:11] johnmoffat: There are several strikes they can choose, but the lower strike the more they will
pay. So....it depends on how much the company is prepared to pay for preimum, and what the worst
exchange rate they are prepared to accept.
[11:35:22] Esther: {johnmoffat} thats if they said they are prepared to accept that rate but if they do not
what do we use?
[11:35:47] Esther: {johnmoffat} ok
[11:35:53] johnmoffat: In the exam there is no 'best' strike to choose - you should explain/illustrate
what will happen for each strike (i.e. what the worst result will be, and how much it will cost)
[11:36:15] Esther: ok
[11:36:24] johnmoffat: {trinistudent001} Yes - you always pay the premium immediately whether or not
you exercise the option.
[11:36:34] Esther: {johnmoffat} so we do for all an dthen chose that is what you are saying?
[11:37:26] johnmoffat: {Esther} For a perfect answer you do for all strikes and then discuss. You cannot
really say which is best of them (unless the question actually said somewhere what worst result they
want)
[11:37:53] Esther: {johnmoffat} o oh ok kool thanks so much
[11:38:03] geeta: geeta: {johnmoffat} ok after succeed question, can u explain the term quantitative
easing?
[11:38:03] johnmoffat: Obviously that takes time in the exam - to get pass marks just make sure you
explain/calculate one strike properly (and strike). The more others you have time for the better.
[11:38:08] Esther: i have more but take it away with geeta
[11:38:10] johnmoffat: {Esther} No problem.
[11:38:47] johnmoffat: {geeta} Yes I will - but first someone asked a question while I was dealing with
Esther. It is only fair to answer - please can he/she ask it again?
[11:39:03] Esther: that is succed
[11:39:07] geeta: i know, its success, that is why i said after her
[11:39:08] geeta: lol
[11:39:36] johnmoffat: I have found the question - I will copy paste
[11:39:40] johnmoffat: the answe r was saying that for eg if interest rate rose to 9% and the put
option had been sold at 9150 exercise price the buyer of the put option would exercise the
option at any future price LOWER than 9150 can u explain what they mean plz
[11:40:03] succeed4me: yep thats my question
[11:40:23] Esther: right i was not getting it done at all
[11:40:45] johnmoffat: If they have a put option at a strike of 91.50 then they have the right to sell a
future at that price.....
[11:40:59] succeed4me: ok
[11:41:01] johnmoffat: However all they have is the option - they do not yet have any futures.....
[11:41:09] succeed4me: ok
[11:41:58] johnmoffat: When it comes time to take the loan, then if interest rates are higher than 8.5%
then the futures price will be lower than 91.50 (100-8,50)......
[11:43:02] johnmoffat: So.......what they do is excercise the option. This means they will have to buy
futures (at a price less than 91.50) and then immediately use the option and sell them at 91.50 and
make a profit......
[11:43:44] succeed4me: or this is to calculae a profit or something and is it the opposite for the
borrower
[11:44:22] Esther: ok geeta and then harmony23 next
[11:44:37] geeta: can u explain the term quantitative easing?
[11:44:46] succeed4me: jus now geera lol
[11:44:49] johnmoffat: So, for example, if the interest rate is 9% then this is 0.5% above the 8.5% 'limit'.
However the futures price will be 91.00 and so if they buy futures at 91.00 and use the option to sell
them at 91.50 then they make a profit of 0.5%. This sets off against the interest they are charged at 9%
giv
[11:44:52] Esther: lol
[11:44:53] geeta: lol-ok
[11:45:21] trinistudent001: geera? lol....ah like it
[11:45:34] succeed4me: i sorry its a typo lol u guys funny
[11:45:41] Esther: lol
[11:46:07] johnmoffat: {geeta} If they government wants to stimulate the economy, the normal way is
to reduce interest rates. This encourages businesses to borrow more and expand etc. etc (and
individuals to spend more rather than saving)......
[11:46:08] trinistudent001: {succeed4me} i know....it was just funny...lol
[11:46:57] johnmoffat: ......however the problem that the UK, US etc have had during the recent crisis
has been that the economy has needed stimulating, but interest rates were already close to zero and
could not be reduced more......
[11:47:05] danidott4e: after harmony 23.....{johnmoffat} what is the best approach to answering a
merger & acquisition question.....i find it difficult to understand what it is they are asking....what are the
main principles to understand
[11:47:29] succeed4me: can u explain whats a vanilla swap or is it jus a normal swap hate it when thoes
funny terms pop up next thing in exam they asking me what is a mango swap or pineapple swap
[11:47:31] harmony23: ok i put my question 1st then :) Can u please briefly explain the value at risk and
EVA?
[11:47:37] geeta: ok
[11:47:47] geeta: {johnmoffat} this is not in my bpp
[11:47:54] trinistudent001: {succeed4me} lol....you got jokes
[11:48:22] kwaku: Hi
[11:48:31] johnmoffat: ......so what they did was put more money into the economy - this is what is
called quantitative easing. The newspapers call it printing money, but what really happens is that the
banks already own government bonds, so the government buys them back from the banks. This means
the banks have .....
[11:48:38] geeta: {johnmoffat} but according to wikki its says this is used when the interest rate is low,
either zero or close to zero
[11:48:39] trinistudent001: {kwaku} hi to you....welcome
[11:48:39] johnmoffat: .....more money to lend out.
[11:49:01] johnmoffat: {geeta} Yes - thats what I just wrote!
[11:49:08] kwaku: i just came what are you guys discu
[11:49:13] succeed4me: or john u real good man
[11:49:15] trinistudent001: {johnmoffat} right.....i was listening to a lecture on it
[11:49:42] Esther: with the APV what rate do we use to discount the flow Kd or the risk free.
[11:49:46] trinistudent001: {kwaku} we are talking about quantitative easing.....a tip from OT
[11:50:05] kwaku: thanks
[11:50:08] geeta: ok, tell me exactly how does this help with the interest rate?
[11:50:08] succeed4me: which lecture is that( trinistudent001)
[11:50:43] trinistudent001: {Esther} good question....i got a bit mixed up
[11:50:46] Esther: soory it harmony turn now
[11:51:05] geeta: {johnmoffat} i dont really understand the concept and how it actually helps, and
would this have the effect of increasing the inflation rate if there is more money circulated into the
ecomony?
[11:51:16] johnmoffat: {geeta} You misunderstood me. It doesnt directly effect the interest rate. It is
just that when interest rates are so low, there is nothing left for the government to do but to put more
money into the economy.
[11:51:16] trinistudent001: {succeed4me} on YouTube
[11:52:06] johnmoffat: {geeta} That is the big risk of doing it. That is why they try to be very careful
about exaclty how much money they put in. SOme inflation is a good thing - it is very high inflation that
is the worry.
[11:53:04] harmony23: Can u please briefly explain the value at risk and EVA?
[11:53:12] geeta: {johnmoffat} so is that why it didnt really help the us during the global crises? or did it
help? if yes in what way?
[11:53:15] johnmoffat: {Esther} I know why you are asking I think - sometime the examiner uses risk ree
and sometimes Kd!!! (In fact the old examiner seems unsure and said he would accept either). Most
sensible is to use Kd since the tax flows depends on the interest flows and therefore have the same risk
[11:53:43] trinistudent001: {Esther} thanks for asking that question....
[11:53:43] Esther: ok
[11:53:46] Esther: thanks
[11:53:51] Esther: harmony now pls
[11:53:58] Esther: Value at risk
[11:54:14] harmony23: yes VAR and EVA ..
[11:54:21] danidott4e: after harmony 23.....{johnmoffat} what is the best approach to answering a
merger & acquisition question.....i find it difficult to understand what it is they are asking....what are the
main principles to understand?
[11:54:43] kwaku: yes VAR VERY IMPORTANT
[11:54:57] succeed4me: VAR is a measure of adverse, unfavorable downside risk
[11:55:19] trinistudent001: {harmony23} {kwaku} Dr Ryan brought that in the last sitting, do you think
he could bring it again?
[11:55:23] succeed4me: it contains 3 elements time horizon, amt of risk and confidence or signficance
level
[11:55:38] Esther: we are running out of time guys so i would advise any other question please post on
ask the tutor and please be as open like if you are talking to him like this so we get all our points
answered . thanks
[11:55:40] harmony23: {trinistudent001} We never no..to be on the safe side
[11:55:49] succeed4me: calculation of VAR
[11:56:08] kwaku: is better you understand everything b4 you go for the exams
[11:56:10] succeed4me: M.STD DEV.SQUAREROOT OF T
[11:56:12] trinistudent001: {harmony23} well true
[11:56:36] johnmoffat: {harmony23} very briefly........let me give a very simple example. Suppose you
have expenses of 5000 a month. Your bank balance is 10000 on average, but it keeps changing up and
down. So, you are OK provided that is does not fall below 5000 because then you go bankrupt. ....
[11:57:10] trinistudent001: {Esther} ok thanks
[11:57:19] kwaku: thank
[11:57:32] johnmoffat: .....well we can measure the probability of it falling below 5000 using normal
distribution tables. More commonly we use normal distribution tables to set a limit which there is only a
(say) 5% chance of falling below.
[11:57:36] Esther: {kwaku} change your colour
[11:58:12] harmony23: {johnmoffat} but the 5% we are assuming it right?
[11:58:31] johnmoffat: For EVA, we take the profit before interest (but after tax) and adjust for noncash items. We then take the balance sheet capital employed and adjust for any assets not capitalised
(eg add goodwill) to get a 'truer' value.
[11:58:58] hamza.bhoy: hmm
[11:59:07] johnmoffat: We then take the adjusted profit, and subtract WACC x adjusted balance sheet
capital.
[11:59:11] hamza.bhoy: {harmony23} thnx 4 askin tht question
[11:59:28] succeed4me: I AM HAVING PROBLEMS WITH CORPORATE RECONSTRUCTION AND
CONVERTIBLE LOAN STOCK SO CONFUSING AT TIMES
[11:59:59] johnmoffat: {harmony23} Yes sorry - you could choose any % but the common ones are 5%
and 1% (so there is only a 5% or a 1% chance of 'collapsing')
[12:00:36] harmony23: {johnmoffat} ok thnx for clarification..
[12:00:56] Trumancapote: what about the formula for VAR?
[12:01:31] johnmoffat: The idea behind EVA is that whatever profit we are making, we need a certain
level to keep our lenders happy. By taking profit less WACC x balance sheet capital, any extra (the EVA)
is actually adding value to the company.
[12:01:37] succeed4me: M * STD DEV * .SQUAREROOT OF T
[12:01:49] hamza.bhoy: {johnmoffat} and sir are those rates fixed?
[12:02:01] hamza.bhoy: like 2.33 for 95%
[12:02:09] Trumancapote: 1.645?
[12:02:13] hamza.bhoy: and the other
[12:02:16] Trumancapote: I think it's fixed
[12:02:26] johnmoffat: {Trumancapote} I think you mean the formula for getting the standard deviation
[12:02:42] succeed4me: WHERE M = CONFIDENCE LEVEL EX 95% = 1.645
[12:02:56] kwaku: can you use NOPAT to calcalte the EVA
[12:03:07] pixel: {johnmoffat} sir i got one imp question
[12:04:23] pixel: the IRP forumlea used by BOB in his answer to SYDONICS question in the pilot paper
[12:04:49] pixel: can u tell me how did he find the forward rate using that formulea
[12:05:13] Esther: ok sir
[12:05:28] johnmoffat: {kwaku} yes, if there are no other adjustments (non cash items)
[12:05:45] kwaku: thanks
[12:05:54] pixel: since IRP formulea is normally spot * (1+ 1st currency borrowing rate)/(1+ 2nd
currency borrowing rate)
[12:06:02] Esther: r we having more time let us know please becasue we are suppose to attend and
another P7 seesion too
[12:06:09] --------------------------Paper P7-------------------------[12:06:21] werty: BP will not be in there - except by sheer coincidence. lisa will have written this exam
some time around january 2009
[12:06:26] --------------------------Paper P4-------------------------[12:06:39] succeed4me: or i have one more question when they say a currency is pegged against
another is there a formula we can use to memorise what to do
[12:06:50] johnmoffat: {Esther} YOu are right sorry again!!!! I have to stop, but I will make sure another
session is arranged in the next few days
[12:07:05] succeed4me: o goshhhhhhhhhhhhhhhh ESTER
[12:07:08] trinistudent001: {johnmoffat} thank you....that will be great
[12:07:14] Esther: ok kool guys we are getting another seession yeaahhhh
[12:07:17] tokunboayoola: Sir! When eaxctly r we expected to calculate Bd. there were 2 qn where Bd;
carpetshop also another qn did nt ention anout systeatic risk
[12:07:19] succeed4me: but i'll appreciate it
[12:07:20] pixel: {johnmoffat} it would be so nice of you if u answer my question
[12:07:20] Esther: thansk so much
[12:07:33] Esther: {pixel} lol we have p7 guy
[12:07:44] johnmoffat: {pixel} I am sorry - ask me again on the next session.
[12:07:45] johnmoffat: Byee
[12:07:52] trinistudent001: {johnmoffat} bye
[12:07:52] Esther: bye thanks again
[12:07:54] succeed4me: p7 is a passer nah worry allyuh licking dat up like soup lol
[12:07:57] pixel: {succeed4me} pegging is where the rate of one currency is fixed against that of another
[12:08:01] succeed4me: bye bye bye
[12:08:03] kwaku: can you summarise for me the benefits of irr,npv,wacc, apv, mirr
[12:08:05] trinistudent001: {succeed4me} lol
[12:08:09] Esther: don't for get to put up ask the tutor and other qestions ok
[12:08:17] trinistudent001: {Esther} ok
[12:08:26] Esther: see you guys thanks all again