Question 1 – 25 marks
a) As at 1 July 2015, a T-bond had the listed spot price being $95.40, and the listed futures price being $95.60. An investor sold $100,000 T-bonds at par value, and bought a T-bond futures contract. On 1 August 2015, the T-bond’s listed spot price was $95.00, and listed futures price was $94.40. Calculate the profit should the investor decide to liquidate his position. (5 marks).
b) Identify and explain five differences between futures and forward contracts. (20 marks).
Question 2 – 25 marks
Equity valuation is based purely on accounting information on the firm’s performance. It does not require the analyst to access information outside the company’s financial statements in order to forecast company earnings and returns.
a) Provide a critical but brief evaluation of this statement based on your understanding of the role of fundamental analysis in determining equity value. (13 marks).
b) Consider the process of equity valuation based on fundamental analysis and the information required for this process. What types of information would prove useful to the equity analyst? From where would each form of information that you mention be sourced? (12 marks).
Question 3 – 25 marks
An investor is evaluating three investment funds, for which the average returns, standard deviations and betas are given below. Assume the risk-free return during the relevant period is 8%.
Average Return | Standard Deviation | Beta | |
Fund 1 | 22% | 25% | 1.3 |
Fund 2 | 20% | 18% | 1.2 |
Fund 3 | 15% | 12% | 1.1 |
a) Distinguish Sharpe’s measure from Treynor’s measure. (13 marks).
b) Fir each of the above 3 funds, determine: i) the Sharpe measure, ii) the Treynor measure. (12 marks).
Question 4 – 25 marks
a) Identify three variables that determine option prices, and discuss the relationship among these variables. Your answer should distinguish, where relevant, between put and call options. (15 marks).
b) The follow data relates to a call option:
SO= $70; X = $70; T = 0.2 years; r = 0.06 annually; σ = 0.4 (annually).
No dividends will be paid before the option expires. Determine the value of the call option using the Black-Scholes Option Pricing Model. (10 marks).