ACCA P4 Advanced Financial Management - 2010 - Study text - Emile Woolf Publishing
Подождите немного. Документ загружается.
Answers
© EWP Go to www.emilewoolfpublishing.com for Q/As, Notes & Study Guides 515
The total gain on the futures position:
= 28 contracts × 61.5 ticks per contract × £12.50 per tick
= £21,525.
(The gain on the futures position offsets the cost of the increase in the interest
rate above the rate fixed by the futures contract (6% - 5.39% = 0.61%). The
extra borrowing cost is £21 million × 0.61% × 2/12 = £21,350. The difference of
£175 is due to the basis risk).
Options on futures
The company will exercise its options to sell futures at the strike price for the
option, and will then close the futures position, giving a gain on closing the
futures position.
Strike price
94750
Strike price
95000
Option strike price to sell 94.750 95.000
Buying price to close 93.995
93.995
Gain (ticks) 0.755
1.005
Total gain:
28 × 75.5 ticks × £12.50 £26,425
28 × 100.5 ticks × £12.50
£35,175
However, after taking into account the cost of the option premiums, the net
gain is reduced.
FRA
The company’s FRA bank will make a payment equivalent to (6% - 5.38%) =
0.62% per year on £21 million for two months, to settle the FRA.
The gain on the FRA will offset the higher interest cost of borrowing.
48 Black-Scholes
Step 1: Calculate d
1
()
0.50.090.5c
0.50.09
0.50.05
900
870
ln
d
1
×+
×
×+
⎟
⎠
⎞
⎜
⎝
⎛
=
ln (870/900) = ln 0.96667. Using a calculator, the natural logarithm of 0.96667 can be
obtained. This is – 0.0339.
0.7071 0.30 0.5
0.7071 0.30
0.0250.0339
d
1
××+
×
+−
=
= (-0.0089/0.21213) + 0.106
=-0.042, say-0.04
Paper P4: Advanced Financial Management
516 Go to www.emilewoolfpublishing.com for Q/As, Notes & Study Guides © EWP
Step 2: Calculate d
2
(
)
0.5 0.090.042tdd
12
×−−=σ−=
=-0.042-0.212
=-0.254, say –0.25
Step 3: Obtain values for N(d
1
) and N(d
2
)
(a) N(d
1
). When d
1
= 0.042, the corresponding value in the normal distribution
table is 0.0160. The value of d
1
is negative, so subtract from 0.50. N(d
1
) = 0.5000
– 0.0160 = 0.4840.
(b) N(d
2
). When d
2
= 0.25, the corresponding value in the normal distribution
table is 0.0987. The value of d
2
is negative, so subtract from 0.50. N(d
2
) = 0.5000
– 0.0987 = 0.4013.
Step 4: Calculate the option price
The value of e
-rt
The value of rt is (0.05)(0.5) = 0.025.
The value of e
-0.025
is the same as 1/e
0.025
. Using a calculator, the value of e
0.025
can be
obtained: this is 1.0253. Therefore e
-0.025
= 1/1.0253 = 0.9753.
Option price
= P
S
N(d1) – X e
-rt
N(d2)
= 870 (0.4840) – 900 (0.9753) (0.4013)
= 421 – 352
= 69
The option price is 69.
49 Put-call parity
Value of put option + Current share price = Value of call option + PV of exercise
price.
The PV of the exercise price = 600 × 1/(1.04)
0.5
= 600 × 0.9806 = 588
Value of put + 582 = 33 + 588
Value of put = 39
Answers
© EWP Go to www.emilewoolfpublishing.com for Q/As, Notes & Study Guides 517
50 Delta hedge
(a) The bank should hold one share in TER for every 8 call options (1/0.125) that
it writes.
(Alternatively, if it buys call options, it should sell one share forward for
settlement on the option expiry date for every 8 options that it buys).
(b)
Calculate d
1
d
1
=
ln
258
260
⎛
⎝
⎜
⎞
⎠
⎟
+ 0.04 x 0.5
()
0.16 x 0.5
+0.5 x 0.16 x 0.5
ln (258/260) = ln 0.9923. Using a calculator, the natural logarithm of 0.9923 can
be obtained. This is – 0.0077.
d
1
=
−0.0077 +0.02
0.40 x 0.7071
+0.5 x 0.40 x 0.7071
=(0.0123/0.2828)+0.1414
=0.185
The bank should hold one share in BVZ for every 5.4 call options (1/0.185)
that it writes.
(Alternatively, if it buys call options, it should sell one share forward for
settlement on the option expiry date for every 5.4 options that it buys).
51 Bonus scheme
Bonus linked to EVA
It is assumed that research and development costs should be capitalised. The EVA
in the year just ended is therefore as follows.
$ million
Sales 683.0
Cost of sales (421.0)
Depreciation (65.0)
Tax: 44 + [(14 + 35) × 30%] (58.7)
NOPAT 138.3
Interest should be calculated on the capital employed at the beginning of the year,
adjusted to include the research and development costs in the previous three years
that should be capitalised for the purpose of EVA calculations.
Capital employed (in $ million) = 525 + (14 × 3) = 567
Notional interest at 9% = $51.03 million, say $51.0 million.
$ million
NOPAT 138.3
Notional interest (51.0)
EVA 87.3
Paper P4: Advanced Financial Management
518 Go to www.emilewoolfpublishing.com for Q/As, Notes & Study Guides © EWP
If the bonus payment is 0.5% of EVA, on the basis of the previous year’s EVA the
executive could expect to receive $436,500 as a cash bonus.
Share options
The share options would be call options. Their value can be estimated from the
value of a similar put option, using the put-call parity theorem.
Value of put = Value of call – Current market value + Strike price × e
-rT
.
30 = Value of call – 140 + 140 × e
-(0.05 × 1)
30 = Value of call – 140 + (140 × 0.951229)
Value of call = 36.83cents.
The value of at-the-money call options on 2 million shares, with an exercise date in
one year, is therefore about $736,600.
52 Delta neutral
(a)
Barn plc could either buy put options on Door plc shares, or could write call
options. With put options, the company would pay a premium to secure a worst-
possible share price. With call options, the company would receive income from
selling the options but would be exposed to a risk of a rise in the share price above
the exercise price.
The company should choose November options, and might consider a strike price of
either 600 or 650.
If Barn plc buys November put options, it will buy 4,000 contracts.
(1)
If it buys put options at 600, the option premium payable will be 22.0. If the
share price at the end of November is 580, the put options will be exercised for
a gain of 20 (600 – 580). However, allowing for the premium, the net loss will
be 2.0 pence per share or £80,000 in total compared with a strategy of not
hedging the risk with options and selling the shares at the current market
price of 580.
(2)
If it buys put options at 650, the option premium payable will be 47.5. If the
share price at the end of November is 580, the put options will be exercised for
a gain of 70 (650 – 580). Allowing for the premium, the net gain will be 22.5
pence per share or £900,000 in total compared with a strategy of not hedging
the risk with options and selling the shares at the current market price of 580.
(b)
To establish a delta neutral position, the company should sell call options. If the
share price goes up, the value of the investment in 4 million shares will rise, but this
will be offset by the loss on the call options, leaving the net value of the investment
unchanged. If the share price falls, the loss in the value of the shares will be offset by
a gain on the options position.
The option delta for the relevant option is 0.46, which means that for every 1 share
held, the company would sell 1/0.46 = 2.1739 call options on the shares, or 8,695,600
call options in total.
Answers
© EWP Go to www.emilewoolfpublishing.com for Q/As, Notes & Study Guides 519
A problem with establishing a delta neutral hedge is that ideally at-the-money
options should be sold, but these are not normally available as traded options.
Another problem is that the option delta is only applicable over a fairly narrow
range of prices for a share. If the share price moves by more than a small amount,
the option delta changes and options must be cancelled or written in order to re-
establish a delta neutral hedge. The position therefore needs continual monitoring
and adjusting if the share price is volatile.
Paper P4: Advanced Financial Management
520 Go to www.emilewoolfpublishing.com for Q/As, Notes & Study Guides © EWP
© EWP Go to www.emilewoolfpublishing.com for Q/As, Notes & Study Guides 521
Paper P4
Advanced Financial Management
i
Index
DC
A
Accounting:economicmodel 47
Acquisitions 230
Adjusted present value method (APV) 186
Agencytheory 22
All‐shareconsideration 271
Alphafactor 136
Altman’s Z score 277
Annualvolatilityofaproject 103
Annuities 59
Assetbeta 173
Audit committee 29
B
BankforInternationalSettlements(BIS)439
Bankers’acceptances 295
Base case NPV 187
Base rates 292
Basis 357
Basis risk 358
Beta factor of a portfolio 129
Beta factor of a security 133
Beta factor of a small portfolio 135
Bid rate 313
Bill of exchange 295
Black-Scholes option pricing model 403
Grabbe variant 410
Board committees 28
Board of directors 27
Bondduration 67
Bond futures 375
Book value 240
Borrowers’options 391
Boundedrationality 24
Business reorganisation 282
C
Calculating the NPV of a project 57
Call options 379
Capital allowances 76
Capital asset pricing model (CAPM) 132
advantages and disadvantages 138
formula 133
Capital rationing 195
Capital reconstruction 279
Caps 393
Carbon neutrality 45
Carbontrading 52
Cash flow forecasting 298
Cash management 298
Paper P4: Advanced Financial Management
522 Go to www.emilewoolfpublishing.com for Q/As, Notes & Study Guides © EWP
Certificate of deposit (CDs) 296
Closing positions 354
Coefficient of variation 116
Collars 395
Commercial paper (CP) 296
Commodity futures 350
Commodityoption 378
Commonmarkets 432
Communicationwithshareholders 30
Competition law 235
Corporate code of ethics 35
Corporatefailurepredictionmodels 276
Corporategovernance:improvement 27
Corporategovernance:othercountries 30
Corporatesocialresponsibility 21
Cost of capital and gearing 158
Cost of debt capital 148
Cost of equity 144
CAPM method 147
Coupon-bearing instruments 294
Coupon swap 339
Countertrade 306
Credit arbitrage 343
Credit ratings 153
Credit risk 300
Cross rates 320
Currency futures 362
Currency options 386
Currency risk 211
Currency swaps 345
Currency transaction exposures 308
D
DCFandinflation 81
DCFandtaxation 75
DCF appraisal: investment in a 222
developing country
Delta 419
Delta hedging 416
Demergers 282
Directors’ remuneration 29
Discount instruments 294
Discount tables 58
Discounted cash flow: net present 56
value method
Discountedpaybackperiod 63
Disposal value 239
Distribution tables 105
Divestments 283
Dividend growth model method 145
Dividend policy 38
monitoring 39
Dividend valuation model method 144
constant annual dividends 242
constant rate of growth in annual 244
dividends
Documentary credits 304
Duration 65
E
Ecological footprint 44
Economic model: accounting 47
Economic value added (EVA) 256
Efficient portfolio 125
Environmental audits 47, 50
Environmental footprint 44
Environmental reporting 47
Environmental risk 44, 46
Equity: cost 144
Estimating future spot exchange rates 217
Exercise price 380
Exchange controls 212
Exchange rate risk 211
Exchange rates and volatility 309
Exercising options 383
Expected value 91
Expiry date 379
Export factoring 305
Index
© EWP Go to www.emilewoolfpublishing.com for Q/As, Notes & Study Guides 523
F
Financialfutures 350
Financialmanagement:ethicalissues 34
Financialoption 378
Financialriskmanagement 300
Financialstrategyformulation 32
Financial synergies 234
Fiscal risk 94, 215
reduction 95, 216
Fixed exchange rate policy 311
Floating rate debt 148
Floors 395
Foreign exchange risk 308
Foreign investment decisions: affecting 210
factors
Forfaiting 305
Forward contracts 316
Forward rate agreement (FRA) 333
Forward rates 316
Free cash flow 253
Free floating 310
Free trade 432
Futures exchanges 350
Futures prices 351
FX risk 211
FX swaps 346
G
Gamma 420
Gearing and cost of capital 158
Going private 286
Gordon growth model 38
Gordon’s growth approximation 145
Greeks, The 419
H
Hedging risk 321
Hedging with options 385
Hostile takeover bid 235
I
Imperfecthedges 360,388
InflationandDCF 81
Inter-bank market 291
Interestcostsandtaxation 75
Interest rate option 390
Interestrateparitytheory 219
Interestraterisk 330
Interest rate swap 338
Internalcontrolandriskmanagement 30
Internal rate of return (IRR) 69
International Bank for Reconstruction 438
and Development (IBRD)
International bond markets 435
International CAPM 139
International Development Association 438
(IDA)
International equity 436
International Fisher effect 219
International lending 435
International money markets 436
International Monetary Fund (IMF) 438
International sources of finance 228
Investment portfolio: choice 124
Investment risk 114
Investor preferences: indifference 125
theory
Irredeemable fixed rate debt 148
K
KMV/Moody’s model 278
L
Lenders’ options 392
Letters of credit 304
Libor 291
Paper P4: Advanced Financial Management
524 Go to www.emilewoolfpublishing.com for Q/As, Notes & Study Guides © EWP
M
Managed floating 311
Management buyouts/ buy-ins 284
Margin 352
Market portfolio 126
Market premium 128
Market timing theory 184
Market value added (MVA) 261
Mergers 230
Modified internal rate of return (MIRR) 72
Modigliani-Miller 159
Money cost of capital 81
Money market hedge 325
Money market instruments 294
Money markets 290
Monte Carlo simulation 96
capital investment appraisal 99
Multinational companies 422
double taxation agreement 425
tax planning 427
tax rates 425
withholding tax 425
Multi-period capital rationing 196
Multivariate discriminant analysis 276
N
Netpresentvaluemethodofinvestment 56
appraisal
Netting 321
Notionalloansanddeposits 335
Normaldistribution 105
O
Offer rate 313
Open positions 354
Opportunism 24
Options 378
Organisation:objectives 20
P
Paybackperiod 63
Pecking order theory 183
Perpetualbonds 148
Perpetuities 62
Preferenceshares 151
Primarycorporateobjective 20
Protectionism 431
Political risk 212
Portfolio theory 118
Premiums and discounts 318
Present value of the tax shield 189
Private equity 287
Project value at risk 103
Project volatility 101
Purchase consideration 270
Purchasing power parity (PPP) theory 217
Put call parity 408
Put options 379
Q
Quotingexchangerates 315
R
Real cost of capital 81
Real option 203, 378
valuation 207
Real options theory 204
Redeemable fixed rate bonds 149
Redeemable fixed rate debt 149
Reducing balance method 77
Regulatory framework for mergers 234
and acquisitions
Repo market 292
Retained earnings 39
Revenue synergies 233