FINC13-304 Financial Markets and Institutions
1
2010 May Semester (102)
FINC13-304 Financial Markets and Institutions PLEASE DO NOT OPEN THIS PAPER UNTIL INSTRUCTED TO DO SO. COMMENCEMENT OF PERUSAL WILL BE ANNOUNCED. DURING PERUSAL – (1)
Notes may only be made on Scrap paper if it is not a “Multiple Choice or Short Answer” Examination Paper
(2)
Writing is NOT PERMITTED on Examination Answer Booklets, “Multiple Choice & Short Answer” Exam Question Papers, Drawing Paper, Graph Paper or Accounting Paper
2
2010 May Semester (102) End of Semester Examination
FINC13-304 Financial Markets and Institutions Date of Examination: 20th August 2010 Venue: Sports Hall Start Time: 15:00 Perusal: 15 mins - reading time Duration: 2 hours - writing time Course Coordinator: Professor Barry Williams Instructions to the Candidate: The exam is CLOSED book. 1) Show ALL workings. 2) Answer ALL questions. 3) Calculators are permitted except for programmable calculators and calculators with text capability. This exam is worth forty-five (45) percent of the final mark. In order to achieve a passing grade in this subject you must achieve at least 50% in this exam. Questions are to be answered in the space provided. This exam paper has attached a sheet of useful formulae and a set of normal distribution tables. If a question specifies that a particular number of reasons or examples are to be provided only the examples or reasons provided up to the specified number will be marked.
NAME:
_________________________________________________
STUDENT NUMBER:
_____________________________________ Turn to next page
3
EXAMINERS USE ONLY: QUESTION 1 2 3 4 5 6 7 8 9 TOTAL
MARK
Turn to next page
4
Question 1. Discuss the main features of three (and no more than three) different ways a firm can raise equity funds. (6 marks)
Turn to next page
5
Question 2. (i) Given that the pure expectations approach to yield curves is appropriate for shorter maturities, your task is to generate a quote for a 2/9 FRA. Assume for the purposes of these calculations that 30 days is one month, you obtain the following bank bill quotes. By market convention these securities are calculated using a 365-day interest year. Use the bank bill quotes provided below to calculate your FRA quote, you must calculate both a buy and sell quote. (4 marks) BANK BILL QUOTES: Maturity 30 days 60 days 90 days 120 days 180 days 270 days
Rate 5.40/5.45 5.32/5.37 4.90/4.95 4.75/4.80 4.65/4.70 4.50/4.55
(ii) A client calls you and states that he wishes to borrow $50,000,000, starting in two months time, with the funds needed for seven months. Your client wishes to use a FRA to hedge interest rate risk. What is the rate that will apply for this FRA? (round your answer to three decimal places, e.g. 9.123%) (1 mark) (iii) The client accepts your correctly stated quote. In two month’s time the relevant market rate is 5.45%. What is the resulting cash settlement? Demonstrate with calculations that the FRA has removed any interest rate risk. (4 marks)
Turn to next page
6
Question 3. Ram Co and Goat Co can borrow as follows: Debt Market Fixed Rate Floating Rate
Ram Co 6.5% BBR + 0.2%
Goat Co 9% BBR+ 0.8%
Assume both companies wish to borrow $20,000,000. (i)
Is it possible for these companies to lower their borrowing costs? Demonstrate your answer. (2 mark)
(ii)
Ram will only engage in a transaction with Goat as long as Big Bank acts as an intermediary. Big Bank has stated that it will only act as an intermediary if each party pays a fee of 0.025%. Ram will engage in a swap if it achieves a saving of 1% after all fees. Demonstrate how this is possible. Your answer must be illustrated with a diagram and include calculations of all savings for all parties. (6 marks)
Turn to next page
7
Question 4. The recent Global Financial Crisis was the first real test of the structures put in place by the Wallis report. In the light of the experience of 2008 and 2009, discuss where you feel the Wallis Report got it right and got it wrong. (14 marks)
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8
Question 5. a) You have an asset worth $45,000,000, which has a one-day standard deviation of 0.83%. If you currently have capital of $664,830. What is the probability you will lose all your capital in the next 24 hours? (3 marks) b) You have a portfolio worth $72,000,000, which has a one day standard deviation of 0.76%. What is the five-day Value at Risk at the 95% level in both dollars and percent? (4 marks)
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9
Question 6. What is Value at Risk (VaR)? Why do we use one tailed measures for VaR? Discuss some problems associated with using VaR. Given these problems, why do we use VaR? (14 marks)
Turn to next page
10 Question 7. How did Credit Rating Organisations (CROs) contribute to the Global Financial Crisis? What have been the Australian responses to these concerns? (12 marks)
Turn to next page
11
Question 8. a) Given the following portfolio data, calculate the VaR (99%) in both dollars and percent. Note that the standard deviation is for one day. In your answer indicate the undiversified VaR(99%) figure in dollars. You must use the matrix method. (10 marks) Correlation Matrix:
ABC DEF GHI
ABC DEF GHI
ABC DEF GHI 1.0 0.6 0.35 0.6 1.0 0.1 0.35 0.1 1.0 Value $ 9m 9m 12 m
Std Dev. 0.39% 0.06% 0.12%
b) What is the VaR of this portfolio for 10 days? (Both dollars and percent) (4 marks)
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12
Question 9. As they apply to the financial sector, what are consolidation, convergence and conglomeration? Provide an example of each. (6 marks)
Turn to next page
13
End
14 Formula Sheet.
R 1 1 i i 1 1- 1+i n PV R i PV= R An i
PV
2p WVCVW
n
'
VaR p Vi CV i ' 1 rn n 365 365 rf 1 1 rm m 365 n m
End
15
End
2010 May Semester (102)
FINC13-304 Financial Markets and Institutions PLEASE DO NOT OPEN THIS PAPER UNTIL INSTRUCTED TO DO SO. COMMENCEMENT OF PERUSAL WILL BE ANNOUNCED. DURING PERUSAL – (1)
Notes may only be made on Scrap paper if it is not a “Multiple Choice or Short Answer” Examination Paper
(2)
Writing is NOT PERMITTED on Examination Answer Booklets, “Multiple Choice & Short Answer” Exam Question Papers, Drawing Paper, Graph Paper or Accounting Paper
2
2010 May Semester (102) End of Semester Examination
FINC13-304 Financial Markets and Institutions Date of Examination: 20th August 2010 Venue: Sports Hall Start Time: 15:00 Perusal: 15 mins - reading time Duration: 2 hours - writing time Course Coordinator: Professor Barry Williams Instructions to the Candidate: The exam is CLOSED book. 1) Show ALL workings. 2) Answer ALL questions. 3) Calculators are permitted except for programmable calculators and calculators with text capability. This exam is worth forty-five (45) percent of the final mark. In order to achieve a passing grade in this subject you must achieve at least 50% in this exam. Questions are to be answered in the space provided. This exam paper has attached a sheet of useful formulae and a set of normal distribution tables. If a question specifies that a particular number of reasons or examples are to be provided only the examples or reasons provided up to the specified number will be marked.
NAME:
_________________________________________________
STUDENT NUMBER:
_____________________________________ Turn to next page
3
EXAMINERS USE ONLY: QUESTION 1 2 3 4 5 6 7 8 9 TOTAL
MARK
Turn to next page
4
Question 1. Discuss the main features of three (and no more than three) different ways a firm can raise equity funds. (6 marks)
Turn to next page
5
Question 2. (i) Given that the pure expectations approach to yield curves is appropriate for shorter maturities, your task is to generate a quote for a 2/9 FRA. Assume for the purposes of these calculations that 30 days is one month, you obtain the following bank bill quotes. By market convention these securities are calculated using a 365-day interest year. Use the bank bill quotes provided below to calculate your FRA quote, you must calculate both a buy and sell quote. (4 marks) BANK BILL QUOTES: Maturity 30 days 60 days 90 days 120 days 180 days 270 days
Rate 5.40/5.45 5.32/5.37 4.90/4.95 4.75/4.80 4.65/4.70 4.50/4.55
(ii) A client calls you and states that he wishes to borrow $50,000,000, starting in two months time, with the funds needed for seven months. Your client wishes to use a FRA to hedge interest rate risk. What is the rate that will apply for this FRA? (round your answer to three decimal places, e.g. 9.123%) (1 mark) (iii) The client accepts your correctly stated quote. In two month’s time the relevant market rate is 5.45%. What is the resulting cash settlement? Demonstrate with calculations that the FRA has removed any interest rate risk. (4 marks)
Turn to next page
6
Question 3. Ram Co and Goat Co can borrow as follows: Debt Market Fixed Rate Floating Rate
Ram Co 6.5% BBR + 0.2%
Goat Co 9% BBR+ 0.8%
Assume both companies wish to borrow $20,000,000. (i)
Is it possible for these companies to lower their borrowing costs? Demonstrate your answer. (2 mark)
(ii)
Ram will only engage in a transaction with Goat as long as Big Bank acts as an intermediary. Big Bank has stated that it will only act as an intermediary if each party pays a fee of 0.025%. Ram will engage in a swap if it achieves a saving of 1% after all fees. Demonstrate how this is possible. Your answer must be illustrated with a diagram and include calculations of all savings for all parties. (6 marks)
Turn to next page
7
Question 4. The recent Global Financial Crisis was the first real test of the structures put in place by the Wallis report. In the light of the experience of 2008 and 2009, discuss where you feel the Wallis Report got it right and got it wrong. (14 marks)
Turn to next page
8
Question 5. a) You have an asset worth $45,000,000, which has a one-day standard deviation of 0.83%. If you currently have capital of $664,830. What is the probability you will lose all your capital in the next 24 hours? (3 marks) b) You have a portfolio worth $72,000,000, which has a one day standard deviation of 0.76%. What is the five-day Value at Risk at the 95% level in both dollars and percent? (4 marks)
Turn to next page
9
Question 6. What is Value at Risk (VaR)? Why do we use one tailed measures for VaR? Discuss some problems associated with using VaR. Given these problems, why do we use VaR? (14 marks)
Turn to next page
10 Question 7. How did Credit Rating Organisations (CROs) contribute to the Global Financial Crisis? What have been the Australian responses to these concerns? (12 marks)
Turn to next page
11
Question 8. a) Given the following portfolio data, calculate the VaR (99%) in both dollars and percent. Note that the standard deviation is for one day. In your answer indicate the undiversified VaR(99%) figure in dollars. You must use the matrix method. (10 marks) Correlation Matrix:
ABC DEF GHI
ABC DEF GHI
ABC DEF GHI 1.0 0.6 0.35 0.6 1.0 0.1 0.35 0.1 1.0 Value $ 9m 9m 12 m
Std Dev. 0.39% 0.06% 0.12%
b) What is the VaR of this portfolio for 10 days? (Both dollars and percent) (4 marks)
Turn to next page
12
Question 9. As they apply to the financial sector, what are consolidation, convergence and conglomeration? Provide an example of each. (6 marks)
Turn to next page
13
End
14 Formula Sheet.
R 1 1 i i 1 1- 1+i n PV R i PV= R An i
PV
2p WVCVW
n
'
VaR p Vi CV i ' 1 rn n 365 365 rf 1 1 rm m 365 n m
End
15
End
