Chapter 6 - Equities and Derivative Investments

Question 1

TERP

Answer 1

Theoretical ex-rights price

Cum rights price * ratio/ + Rights price/New total number of shares

1:4 issue (current price = £1) = 4*1/5

Question 2

TNPP

Answer 2

Theoretical nil paid price
Max price someone would pay for the right

TERP-Subscription price=TNPP

Question 3

Warrant premium

Answer 3

The amount extra it costs to buy the warrant over the shares, i.e. the time value of the warrant
WP=(Exercise Price+Price of Warrant)-Share price.

Question 4

Warrant - Gearing Ratio

Answer 4

=(Warrant premium/Exercise Price)*100

Question 5

Number of Contracts required to hedge

Answer 5

=(Portfolio value*Beta)/Futures Value

Question 6

Fair Value of Future

Answer 6

=Spot price - net benefit of carry

Question 7

Balance Sheet Calculation

Answer 7

Assets = Liabilities + Equity (Share capital + Share premium + Retained Eanings)

Question 8

Warrants: Intrinsic value

Answer 8

Share price - exercise price

Question 9

Warrants: Time value

Answer 9

Warrant market price - intrinsic value

Question 10

Warrants: Gearing Ratio

Answer 10

(Share price/ Warrants market price)*100

Question 11

Hedging calculation

Answer 11

(Present Value * Beta)/(Future price * Tick Value)

Question 12

Gilt Hedging calculation

Answer 12

(Portfolio Value*(portfolio duration/futures duration))/Futures value