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Pinnacle Academy
Mock Tests for
November 2015 C A Final Examination
201-202, Florence Classic, Besides Unnati Vidhyalay,
10, Ashapuri Society, Jain Derasar Rd., Akota, Vadodara-20. ph: 98258 561 55
Strategic Financial Management Mock Test 2
Conducted on 25th September 2015
[Solution is at the end with marking for self-assessment]
Time Allowed-2.5 hours
Maximum Marks- 80
Q 1 is compulsory.
Answer any 4 from the remaining.
Q1
(a)
R Ltd. invoices in customers’ currency. Its receipt $1,50,000 is due on June 25.
Today is March 25.
Market information on March 25:
Exchange Rates:
US Rs. / $
Currency Futures:
US Rs. / $
Spot
49.75 49.95
2 months 50.00 50.25
forward
3 months 50.95 50.99
forward
May
June
Initial Margin
May
June
Rs.15,000
Rs.20,000
Currency Options:
US Rs. / $
June Call Strike
June Put Strike
Premium:
June Call:
June Put:
Contract
size:
Rs.2,25,675
50.05
50.15
Interest Rates:
India
US
8%
4%
9%
6%
Contract
size:
Rs.2,25,675
51.30
51.00
Re.0.30 per $
Re.0.20 per $
Market information on June 25:
Spot Rate:
Currency Futures & Options Rate:
Rs.50.85 per $
Rs.50.95 per $
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You are required to calculate receipts as on June 25 for:
(i) Forward Contract
(ii) Currency Futures
(iii) Currency Options
(iv) No Hedging at all
It may be assumed that portion of exposure remaining uncovered either in futures or
options or both is not hedged at all.
Consider opportunity costs.
(10 Marks)
(b)
Extracts from recent financial statements of ABC Ltd. are given below:
Amount
(Rs. in ‘000s)
Turnover
Cost of sales
Gross Profit
Non Current Assets
Current Assets
Inventory
Trade Receivables
Total Assets
Trade Payables
Overdraft
Equity Shares
Reserves
Debentures
Total Liabilities
Amount
(Rs. in ‘000s)
21,300
16,400
4,900
3,000
8,000
4,500
3,500
11,000
3,000
3,000
1,000
1,000
3,000
6,000
5,000
11,000
XYZ Fincorp, a factor has offered to manage the trade receivables of ABC Ltd. under
a servicing and factor-financing agreement. XYZ expects to reduce the average
trade receivables period of ABC from its current level to 35 days; to reduce bad
debts from 0.9% of turnover to 0.6% of turnover and to save ABC Rs.40,000 per
year in administration costs.
XYZ would also make an advance to ABC of 80%. The interest rate on the advance
of factor would be 2% higher than the 7% that ABC currently pays on its overdraft.
XYZ would charge a fee of 0.75% of turnover on a with-recourse basis or a fee of
1.25% of turnover on a non-recourse basis. Fees are payable in arrears.
Assuming 365 days in a year and all sales and purchases are on credit you are
required to evaluate the proposals of XYZ Fincorp.
(10 Marks)
Q2
(a)
AGD is considering the purchase of machine costing Rs.32,00,000. If purchased,
AGD Co. would incur annual maintenance costs of Rs.2,50,000. Machine would be
used for three years and at the end of the period would be sold for Rs.5,00,000.
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Alternatively, machine could be obtained under an operating lease for an annual
rental of Rs.12,00,000 per year payable in advance. Depreciation rate is 25% on
WDV basis and the asset is sole asset. Using after tax borrowing rate of 7%
evaluate whether AGD should purchase or lease the new machine. Tax rate is 30%.
(8 Marks)
(b)
Suppose a bank offers to lend Rs.32,00,000 at 10% p.a. for a period of five years
interest payable every six months. Compute amount of instalment payable at the end
of each six-month period if the offered loan is to be repaid in equal instalments. Also,
determine Annual Percentage Rate (APR) implied by the bank’s offer with interest
payable every six months.
(4 Marks)
(c)
A trader is having in its portfolio shares worth Rs.85 lakhs at current price and cash
Rs.15 lakhs. Beta of share portfolio is 1.6. After 3 months price of shares dropped by
3.2%. Determine:
(i)
(ii)
Q3
(a)
Current Portfolio Beta
Portfolio Beta after 3 months if trader on current date goes for long position
on Rs.100 lakhs Nifty Futures
(8 Marks)
Suppose that a 1-year floor has a floor rate of 4% and a notional amount of Rs.200
crore. Frequency of settlement is quarterly and the reference rate is 3-month
MIBOR. Assume that 3-month MIBOR for the next four quarters is as shown below:
Quarter
1
2
3
4
3-month MIBOR (%)
4.70
4.40
3.80
3.40
You are required to compute payoff for each quarter if floor is purchased.
(4 Marks)
(b)
Current market price of an equity share of Penchant Ltd. is Rs.420. Within a period
of 3 months, maximum and minimum price of it is expected to be Rs.500 and Rs.400
respectively. If risk free rate is 8 % p.a. and opportunity cost of funds is 12 % p.a.
what shall be the value of call option under risk neutral approach at a strike price of
Rs.450? Given: e0.02 = 1.0202 and e0.03 = 1.0303
(8 Marks)
(c)
OJ Ltd. is a supplier of leather goods to retailers in the UK and other western
European Countries. The company is considering entering into a joint venture with a
manufacturer in South America. The two companies will each own 50 % of the
limited liability JV (SA) and will share the profits equally.
₤ 450,000 of the initial
capital is being provided by OJ Ltd. and the equivalent in South American dollars
(SA$) is being provided by the foreign partner, which is in nominal terms:
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Year
1
2
3
SA $ (‘000)
4250
6500
8350
Forward rates of exchange to ₤ sterling
10
15
21
For tax reasons JV (SA) shall be registered in South America.
As the financial advisor of OJ Ltd. you are required to calculate the NPV of the
project at 16 % required return under the two assumptions given below:
Assumption 1: The South American government has put exchange regulations,
which prohibits payment of dividends above 50 % of the annual cash flows for the
first three years of the project. The entire accumulated balance can be repatriated at
the end of the third year.
Assumption 2: The South American government is considering removing exchange
controls and restriction on repatriation of profits. If this happens all cash flows will be
distributed as dividends to the partner companies at the end of each year.
(8 Marks)
Q4
(a)
What is Green Shoe Option (GSO)? Explain its mechanism.
(b)
Following financial data are available for PQR Ltd. for the year 2013:
(6 Marks)
Amount
(Rs. in lakhs)
8 % Debentures
10 % Bonds (2012)
Equity Share (Rs.10 each)
Reserves and Surplus
Total Assets
Assets turnover ratio
Effective interest rate
Effective tax rate
Operating Margin
Dividend Payout ratio
Current MPS
Required rate of return of investors
125
50
100
300
600
1.1
8%
40%
10%
16.67%
14
15%
You are required to –
i.
ii.
iii.
iv.
Draw income statement for the year
Calculate its sustainable growth rate
Calculate fair price for the share using dividend discount model
Decide whether the company’s share be purchased
(8 Marks)
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(c)
Y Ltd. has imported goods worth NZD 40 million, payment to be made after 2
months and has simultaneously exported goods worth NZD 50 million, payment of
which shall be received after 2 months.
Foreign exchange quotes of two banks are as follows:
2 month forward
Bank A
NZD / INR 52.2233 / 52.8516
Bank B
INR / NZD 0.0190 / 0.0192
Required:
Q5
(a)
(i)
What shall be the net receipt after 2 months in INR if the two transactions are
settled separately?
(ii)
What shall be the net receipt after 2 months in INR if only net exposure is
settled?
(6 Marks)
What are Swaptions? What are its uses?
(6 Marks)
(b)
A wheat trader has planned to sell 4,40,000 kgs. of wheat after 6 months from now.
The spot price of wheat is Rs.19 per kg. and 6 months future on same is trading at
Rs.18.5 per kg. (Contract size = 2,000 kg). The price is expected to fall to as low as
Rs.17 per kg 6 months hence. What trader can do to mitigate its risk of reduced
profit? What will be the effective realised price per kg if after 6 months spot price is
Rs.17.5 per kg. and future contract price for 6 months is Rs.17.55 per kg.
(8 Marks)
(c)
In a deal of LCD TV with selling price of Rs.50,000, a customer can purchase it for
cash down payment of Rs.10,000 and balance by adopting any of the following
options:
Tenure of Monthly Instalments
Equated Monthly Instalment (Rs.)
12
24
3,800
2,140
Determine Flat and Effective Rate of Interest for each alternative.
Q6
(a)
(6 Marks)
Describe prominent techniques of Economic Analysis.
(6 Marks)
(b)
Suppose Mr. X lives in a world where there are only two assets for investments,
namely gold and stocks. Following information is available:
Gold Stock Market
Return
8%
20 %
Standard Deviation 25 %
22 %
Correlation
- 0.4
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i. Mr. X is constrained to pick just one, which one he would choose?
ii. Mr. Y, a friend of Mr. X argues that this is wrong. He says that Mr. X is ignoring the big
pay-offs that he can get on gold. How would Mr. X go about alleviating his concern?
iii. How would a portfolio composed of equal proportions of gold and stocks do in terms of
mean and variance?
iv. Mr. X came to know that GPEC (a cartel of gold producing countries) is going to vary
the amount of gold it produces with stock prices. (GPEC shall produce less gold when
stock markets are up and more when it is down). Should allocation to gold be
increased?
(7 Marks)
(c)
Consider a bond selling having face value of Rs.1,000 with 6 years to maturity and 7
% coupon rate and yield. What is the bond’s duration? If the YTM increases to 10%,
what is the new duration? What relationship do you observe between yield and
duration?
(7 Marks)
Solution prepared by
CA. Ashish Lalaji
Be free to send your suggestions / comments to
CA. Ashish Lalaji at 9825856155 /
ashishlalaji@rediffmail.com
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Solution of
SFM Mock Test 2
Conducted on 25th September 2015
Q1
(a)
(i)
Analysis of Forward Contract:
USD shall be sold after 3 months, which the dealer shall buy at contracted forward
rate of Rs.50.95 / $
Receipt on June 25 = 1,50,000 X 50.95 = Rs.76,42,500
(1 Mark)
(ii)
Analysis of Currency Futures:
Contract size is in INR, while requirement is in USD. June futures are quoted at
Rs.50.15 / $.
Contract size in USD = 2,25,675 / 50.15 = $ 4,500
No. of contracts sold = 1,50,000 / 4,500 = 33 contracts
Deal size = 33 X 4,500 = $ 1,48,500
Initial Margin = 20,000 X 33 = Rs.6,60,000
Interest foregone = 6,60,000 X 9% X 3 / 12 = Rs.14,850
Net Pay-off is determined as under –
(a)
(b)
(c)
(d)
(e)
Spot price on June 25 in F & O Market
Contracted futures price for selling
Loss per $
Deal size ($)
Total Loss (Rs.) (Cash outflow)
50.95
50.15
0.80
1,48,500
1,18,800
Futures are cash settled. Actual sale of USD shall take place at then prevailing spot
rate in cash market i.e. Rs.50.85 / $
Receipt on June 25 = (1,50,000 X 50.85) – 1,18,800 – 14,850 = Rs.74,93,850
(4 Marks)
(iii)
Analysis of Currency Options:
USD is to be sold. Hence, right option is put option available at Rs.51 / $.
Contract size in USD = 2,25,675 / 51 = $ 4,425
No. of contracts sold = 1,50,000 / 4,425 = 33 contracts
Deal size = 33 X 4,425 = $ 1,46,025
Options premium = 1,46,025 X 0.2 = Rs.29,205
Interest foregone = 29,205 X 9% X 3 / 12 = Rs.657
Net Pay-off is determined as under –
(a)
(b)
(c)
(d)
(e)
Spot price on June 25 in F & O Market
Strike Price of Long Put
Gain per $
Deal size ($)
Total Gain (Rs.) (Cash inflow)
50.95
51.00
0.05
1,46,025
7,301
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Options are cash settled. Actual sale of USD shall take place at then prevailing spot
rate in cash market i.e. Rs.50.85 / $
Receipt on June 25 = (1,50,000 X 50.85) + 7,301 – 29,205 – 657 = Rs.76,04,939
(4 Marks)
(iv)
Analysis of No Hedging:
Receipt on June 25 = 1,50,000 X 50.85 = Rs.76,27,500
(1 Mark)
Recommendation:
Forward contract in view of highest receipt in INR on June 25
(b)
(Rs. in ‘000s)
Determination of Advance Receivable from factor:
Amount
21,300
4,260
17,040
(a) Credit Sales
(b) Factor reserve @ 20%
(c) Advance Receivable (a – b)
(2 Marks)
Determination of Savings in cost of funds blocked:
Amount
Inhouse management of receivables
3,500 X 7%
Factoring Agreement:
4,260 X 7 % X 35 / 365
245.00
28.59
216.41
(2 Marks)
Cost – Benefit Analysis of Factoring Agreement:
Costs of Factoring:
Factoring Commission
Factoring Discount
(17,040 X 9 % X 35 / 365)
Total Costs (A)
Benefits of Factoring:
Savings in cost of funds blocked
Bad debts avoided
Administrative costs avoided
Total Benefits (B)
Net Benefit of Factoring (B – A)
Recommendation:
Recourse
Non- Recourse
159.75
(21,300 X .75%)
266.25
(21,300 X 1.25%)
147.06
306.81
147.06
413.31
216.41
63.90
(21,300 X .3%)
40.00
320.31
13.50
216.41
191.70
(21,300 X .9%)
40.00
448.11
34.80
Non-recourse factoring deal in view of higher net benefit.
(6 Marks)
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Q2
(a)
Analysis of Purchase Option:
Year
Cash
Cost
0
1
2
3
3
3
32,00,000
2,50,000
2,50,000
2,50,000
Depreciation
Total
Cost
Tax
Savings
@ 30%
Net
Cash
Outflow*
PVF
(7%)
PV
1.00 32,00,000
8,00,000 10,50,000 3,15,000
(65,000) .935
(60,775)
6,00,000
8,50,000 2,55,000
(5,000) .873
(4,375)
----------2,50,000
75,000
1,75,000 .816
1,42,800
Salvage Value (5,00,000) .816 (4,08,000)
Tax savings on STCL (18 – 5 i.e. 13 X 30%)
(3,90,000) .816 (3,18,240)
∑PVCO 25,51,400
* Net Cash Outflow = Cash Cost – Tax Savings
(4 Marks)
Analysis of Lease Option:
Year
0
1
2
3
Lease
Rent
12,00,000
12,00,000
12,00,000
-------------
Tax
Savings
@ 30%
Net
Cash
Outflow
----------3,60,000
3,60,000
3,60,000
12,00,000
8,40,000
8,40,000
(3,60,000)
PVF
(7%)
1.00
.935
.873
.816
∑PVCO
PV
12,00,000
7,85,400
7,33,320
(2,93,760)
24,24,960
(4 Marks)
Recommendation:
(b)
Leasing option in view of lower ∑PVCO.
Bank wants 10% p.a. but interest shall be determined every six months i.e. it wants
5% every six months. Further, tenure of loan shall comprise of 10 periods of six
months.
Equated Six-monthly Instalment
= 32,00,000 / PVF (5%, 10)
= 32,00,000 / 7.722
= Rs.4,14,400
(3 Marks)
Annual Percentage Rate = (1 + r/f) f – 1
Where f = frequency of interest in a year
Annual Percentage Rate = (1 + 0.1/2)2 – 1 = 10.25%
(1 Mark)
Solution prepared by
CA. Ashish Lalaji
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(c)
(i) Determination of Current Portfolio Beta:
Particulars Amount Beta Weight
Shares
Cash
85
15
100
1.6
0
0.85
0.15
1.00
Portfolio Beta = 1.6 (.85) + 0 (.15) = 1.36
(4 Marks)
(ii) Determination of Revised Portfolio Beta:
After 3 months shares are down by 3.2 %. Thus, value of shares is Rs.82.28 lakhs.
Beta of shares is 1.6. So, if shares are down by 3.2% then index shall be down by
2% (3.6 / 2). Trader has long position of Rs.100 lakhs, which is now down to Rs.98
lakhs (100 – 2%). Thus, trader suffers loss of Rs.2 lakhs. This reduces cash balance
to Rs.13 lakhs. Revised position is –
Particulars Amount Beta Weight
Shares
Cash
82.28
13.00
95.28
1.6
0
0.8636
0.1364
1.0000
Revised Portfolio Beta = 1.6 (.8636) + 0 (.1364) = 1.38
(4 Marks)
Alternate Solution:
Revised portfolio value is Rs.95.28 lakhs. Thus, % change in portfolio value is 4.72%
(100 – 95.28 / 100).
% Change in value of Portfolio 4.72
Revised Portfolio Beta = ---------------------------------------- = ------- = 2.36
% Change in Market Index
2
Q3
(a)
If floor is purchased it provides a right to lend at contracted rate without any
obligation to lend.
Determination of Effective Interest Earned for each quarter:
(Rs. in crores)
Quarter
1
2
3
4
MIBOR Floor
(Actual)
4.70
4.40
3.80
3.40
4.00
4.00
4.00
4.00
Difference
Recovered
Interest
@
Actual*
Difference
Recovered
Effective
Interest
Earned
--------0.20
0.60
2.35
2.20
1.90
1.70
------------0.10
0.30
2.35
2.20
2.00
2.00
* 200 X MIBOR X 3 / 12
# 200 X Difference X 3 / 12
(4 Marks)
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(b)
Let the probability of share price rising to Rs.500 be “p”, then probability of share
price falling to Rs.400 shall be “1 – p”.
Expected share price after 3 months = 420 e0.02 = 420 (1.0202) = Rs.428.484
(2 Marks)
500p + 400 (1 – p) = 428.484
500p + 400 – 400p = 428.484
100p = 28.484
p = 0.28484
1 – p = 0.71516
(2 Marks)
Valuation of Call Option after 3 months:
Spot Price
Strike
Value of
After 3 months Price Call Option
Pi
Expected Value
500
450
50
0.28484
400
450
0
0.71516
Expected Value of Call Option after 3 months
14.242
--------14.242
(2 Marks)
Value of Call option as on today
= PV of Rs.14.242
= 14.242 / 1.0202
= Rs.13.96
(2 Marks)
(c)
Year
0
1
2
3
3
Calculation of NPV assuming Exchange controls:
PAT
(SA $)
(Pound)
OJ share
(SA $)
Repatriable Amount
(SA $)
Ex. Rate
4250
6500
8350
2125
3250
4175
1063
1625
2087.5
4775
.1000
.0667
.0476
.0476
OJ Share
(Pound)
PVF (16%)
(450)
106.3
108.39
99.37
227.29
1.000
0.862
0.743
0.641
0.641
NPV:
PV
(450)
91.63
80.53
63.70
145.76
(68.38)
(4 Marks)
Calculation of NPV assuming no Exchange controls:
Year
0
1
2
3
PAT
(SA $)
Repatriable Amount
(SA $)
Ex. Rate
4250
6500
8350
2125
3250
4175
.1000
.0667
.0476
OJ Share
(Pound)
(450)
212.5
216.78
198.73
PVF (16%)
1.000
0.862
0.743
0.641
NPV:
PV
(Pound)
(450)
183.18
161.07
127.39
21.64
(4 Marks)
Solution prepared by
CA. Ashish Lalaji
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Q4
(a)
Green Shoe Option:
Green Shoe Option (GSO) means an option available to the company issuing
securities to the public to allocate shares in excess of the public issue and operating
a post-listing price stabilising mechanism through a stabilising agent.
SEBI inserted a new Chapter No. VIII-A, with effect from August 14, 2003, in the
SEBI (Disclosure and Investors Protection) Regulations, 2000 to deal with the GSO.
The GSO is available to a company which is issuing equity shares through bookbuilding mechanism for stabilising the post-listing price of the shares.
The following is the mechanism of GSO:
i.
The Company shall appoint one of the leading book runners as the Stabilising Agent
(SA), who will be responsible for the price stabilising process.
ii.
The promoters of the company will enter into an agreement with SA to lend some of
their shares to the latter, not exceeding 15% of the total issue size.
iii.
The borrowed shares shall be in the dematerialised form. These shares will be kept
in a separate GSO Demat A/c.
iv.
In case of over subscription, the allocation of these share shall be on pro-rata basis
to all applicants.
v.
The money received from allotment of these shares shall also be kept in a ‘GSO
Bank A/c’, distinct from the issue account , and the amount will be used for buying
shares from the market during the stabilization period.
vi.
The shares bought from the market by SA for stabilization shall be credited to GSO
Demat Account.
vii.
These shares shall be returned to the promoters within 2 days of closure of
stabilisation process.
viii.
In order to stabilise post-listing prices, the SA shall determine the timing and quantity
of shares to be bought.
ix.
If at the expiry of the stabilisation period, the SA does not purchase shares to the
extent of over-allocated shares, then shares to the extent of shortfall will be allotted
by the company to the GSO Demat A/c multiplied by the issue price. Amount left in
the GSO Bank A/c (after meeting expenses of SA), shall be transferred to the
Investors Protection Fund.
(6 Marks)
(b)
Assets turnover ratio = Sales / Total Assets
1.1 = Sales / 600
Sales = Rs.660 lakhs
Operating margin is 10%, which means operating costs are 90% of sales i.e. Rs.594
lakhs.
Total Borrowings = Debentures + Bonds = 125 + 50 = Rs.175 lakhs
Effective interest rate is 8% i.e. interest cost = 175 X 8% = Rs.14 lakhs
(2 Marks)
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(i) Income Statement for the year 2013:
Amount
(Rs. in lakhs)
Sales
Less: Operating Cost
EBIT
Less: Interest
EBT
Less: Tax @ 40%
PAT
Less: Dividend @ 16.67%
Retained Earnings
660.0
594.0
66.0
14.0
52.0
20.8
31.2
5.2
26.0
(2 Marks)
(ii) Sustainable growth rate refers to stable dividend growth rate, g
g = b.r = 83.33 X 7.8% = 6.5 %
where b = retention ratio = 1 – D/P ratio = 1 - .1667 = 0.8333 i.e. 83.33%
r = Return on equity = 31.2 / 100 + 300 i.e. 7.8%
(2 Marks)
(iii)
Current DPS = 5.2 / 10 = Re.0.52
P0 = D1 / ke – g = 0.52 (.065) / 15 % - 6.5 % = Rs.6.52
(1 Mark)
(iv)
True worth of the share is Rs.6.52 but is trading in the market at Rs.14.
The share is overpriced and hence not worth buying.
(1 Mark)
(c)
Tabulation of Exchange Rates:
Bank A
Bank B
Bid Rate Offer Rate Bid Rate Offer Rate
2 months forward rate 52.2233
52.8516 52.0833
52.6316
(i)
For payment of imports NZD is to be purchased, which the dealer shall sell at offer
rate. Amount has to be paid to dealer and hence lower offer rate is preferable.
Hence, bank B is selected.
For receipt of exports NZD is to be sold, which the dealer shall buy at bid rate.
Amount shall be received from dealer and hence higher bid rate is preferable.
Hence, bank A is selected.
Net Receipt after 2 months = (50 X 52.2233) – (40 X 52.6316) = Rs.505.901 million
(4 Marks)
(ii)
Net NZD 10 million shall be sold, which the dealer shall buy at bid rate for which
Bank A is selected.
Net Receipt after 2 months = 10 X 52.2233 = Rs.522.233 million
(2 Marks)
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Q5
(a)
Swaptions are combination of features of two derivative instruments i.e. option and
swap. A swaption is an option on interest rate swap. It gives the buyer of the
swaption the right but not obligation to enter into an interest rate swap of specified
parameters (maturity of the option, notional principal, strike rate and period of swap).
Swaptions are traded over the counter, for both short and long maturity expiry dates
and for wide range of swap maturities. The price of swaption depends on strike rate,
maturity of the option and expectations about the future volatility of swap rates. The
swaption premium is expressed as basis points.
Uses of Swaptions:
i.
Swaptions can be used as an effective tool to swap into or out of fixed rate or
floating rate interest obligations, according to a treasurer’s expectation on interest
rates. Swaptions can also be used for protection if a particular view on the future
direction of interest rates turns out to be incorrect.
ii.
Swaptions can be applied in a variety of ways for both active traders as well as for
corporate treasures. Swap traders can use them for speculation purposes or to
hedge a portion of their swap books. It is a valuable toll when a borrower has
decided to do a swap but is not sure of the timing.
iii.
Swaptions have become useful tools for hedging embedded option which is common
in the natural course of many businesses.
iv.
Swaptions are useful for borrowers targeting an acceptable borrowing rate. By
paying an upfront premium a holder of a payer’s swpation can guarantee to pay a
maximum fixed rate on a swap, thereby hedging his floating rate borrowings.
v.
Swaptions are also useful to those businesses tendering for contracts. A business
would certainly find it useful to bid on a project with full knowledge of the borrowing
rate should the contract be won.
(6 Marks)
(b)
If price of wheat is expected to fall then appropriate future strategy is to short futures.
(2 Marks)
No. of contracts to be sold = 4,40,000 / 2,000 = 220
Determination of gain / loss on settlement of futures and effective realised
price per kg:
(i)
(ii)
(iii)
(iv)
(v)
(vi)
(vii)
(viii)
Spot price in futures market after 6 months (for buying per kg)
Contracted futures price for selling (per kg)
Gain per kg.
Contract size (220 X 2,000)
Total gain from futures (iii X iv)
Sale proceeds of wheat in cash market (4,40,000 X 17.5)
Total cash inflow (v + vi)
Effective realised price per kg (vii / 4,40,000)
17.55
18.50
0.95
4,40,000
4,18,000
77,00,000
81,18,000
18.45
(6 Marks)
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(c)
Total HP Price = Down Payment + Instalments
Option 1:
10,000 + (3,800 X 12) = Rs.55,600
Option 2:
10,000 + (2,140 X 24) = Rs.61,360
Finance Charges = HP Price – Cash Price
Option 1:
55,600 – 50,000 = Rs.5,600
Option 2:
61,360 – 50,000 = Rs.11,360
(2 Marks)
Finance Charges
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Flat Rate of Interest = ----------------------------------------- X ----- X 100
(Cash Price – Down Payment)
n
Option 1:
(5,600 / 40,000) X 12 / 12 X 100 = 14%
Option 2:
(11,360 / 40,000) X 12 / 24 X 100 = 14.2%
(2 Marks)
n
Effective Interest Rate = -------- X 2 Flat Interest Rate
n+1
Option 1:
(12 / 13) X 2 (14) = 25.85%
Option 2:
(24 / 25) X 2 (14.2) = 27.26%
(2 Marks)
Q6
(a)
Prominent techniques used for Economic Analysis are:
A. Anticipatory Surveys: They help investors to form opinion about the future state
of the economy. It incorporates expert opinion on construction activities,
expenditure on plant and machinery, levels of inventory – all having a definite
bearing on economic activities. Also, future spending habits of consumers are
taken into account.
B. Barometer / Indicator Approach: Various indicators are used to find out how
the economy shall perform in the future. The indicators have been classified as
under:
(i) Leading Indicators: They lead the economic activity in terms of their
outcome. They relate to the time series data of the variables that reach high
and low points in advance of economic activity.
(ii) Roughly Coincidental Indicators: They reach their peaks and troughs at
approximately the same time in the economy.
(iii) Lagging Indicators: They are time series data of variables that lag behind in
their consequences vis-à-vis the economy. They reach their turning points
after the economy has reached its own already.
All these approaches suggest direction of change in the aggregate economic
activity but nothing about its magnitude.
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C. Economic Model Building Approach: In this approach, a precise and clear
relationship between dependent and independent variables is determined. GNP
model building or sectoral analysis is used in practice through the use of national
accounting framework.
(6 Marks)
(b)
i. Mr. X shall select to invest in stock market since it dominates gold on both average
return and standard deviation.
ii. The higher possible returns on gold are balanced by the lower possible returns other
times. Note that the average return on gold is much less than that of the stock market.
iii. Expected portfolio return is 14%, Portfolio variance is 167.25 % and portfolio SD is
12.93 %
iv. If the supply of gold is negatively correlated with the level of market and the price of
gold is inversely related to supply of gold then there shall be strong positive correlation
between the return of stock market and return on gold. This would make gold less
desirable since it does not aid in reducing portfolio risk. The allocation of gold in the
portfolio shall reduce.
(1 + 1 + 3 + 2 = 7 Marks)
(c)
Determination of Duration at yield of 7% and 10%:
Year
1
2
3
4
5
6
Cash PVF
PV
Year X
PVF
PV
Year X
Inflows (7%)
PV (10%)
PV
70 .935
65.45
65.45
.909
63.63
63.63
70 .873
61.11
122.22
.826
57.82
115.64
70 .816
57.12
171.36
.751
52.57
157.71
70 .763
53.41
213.64
.683
47.81
191.24
70 .713
49.91
249.55
.621
43.47
217.35
1,070 .666 712.62 4,275.72
.564 603.48 3,620.88
999.62 5,097.94
868.78 4,366.45
Duration at yield of 7% = 5,097.94 / 999.62 i.e. 5.0999 ~ 5.1 years
Duration at yield of 10% = 4,366.45 / 868.78 i.e. 5.026 years
Duration of bond decreases as yield increases i.e. yield and duration are inversely
related.
(3 + 3 + 1 = 7 Marks)
Solution prepared by
CA. Ashish Lalaji
Be free to send your suggestions / comments to
CA. Ashish Lalaji at 9825856155 /
ashishlalaji@rediffmail.com
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