FM General

Question 1

Forward Exchange: UK Exporter

Answer 1

Right side of split, if premium subtract. ADD if discount.

Question 2

Forward exchange: UK importer

Answer 2

Left side of split, if premium subtract. Add if discount.

Question 3

MM Hedge: UK Importer (FC payment in future)

Answer 3

Create pound liability which, with interest, will equal the liability in x months time.

1) Apportion FC interest rate
2) Divide foreign currency liability by FC lending deposit rate (liability / 1 + apportioned borrowing rate)
3) Convert at spot rate (divide)
4) Apportion UK borrowing rate
5) Multiply by UK borrowing rate to find out how much to borrow in UK

Question 4

MM Hedge: UK Exporter (FC receipt in future)

Answer 4

Create FC liability which, with interest, will equal the receivable in x months time.

1) Apportion FC borrowing rate
2) Borrow amount in foreign currency (receivable/ 1 + apportioned borrowing rate)
3) Convert at spot rate (divide)
4) Deposit in UK, multiply by apportioned UK deposit rate.

Question 5

Currency futures: UK exporter (FC receipt in future)

Answer 5

• Buy pound futures
• divide receipt amount by futures FX rate then divide by value of contracts to find out how many
• calculate outcome on futures sell rate - buy rate * contracts * contract value
• convert gain at the future spot rate
• actual transaction: 3m / spot rate

futures - have to close out. so always make a gain or loss on futures and this offsets the net

Question 6

Currency Futures: UK importer (FC liability in future)

Answer 6

-Sell pound futures now

-

Question 7

Traded Options: UK importer (FC liability in future) , pound options

Answer 7

Put option since selling pounds in future to buy FC.
-if exercise, calculate gain on option (gain#contractssize of contract) this gives profit in FC
-then add / deduct the the profit on option to the receipt / payment then convert at spot rate
then add / deduct the premium

Question 8

Traded Options: UK importer . Rupee options

Answer 8

Call option on rupees since want a right to buy them at a set price in x months.

Question 9

OTC Options on Pounds: UK Exporter

Answer 9

Call option on pounds since buying pounds in future with FC.

Question 10

Interest rates FRA’s - borrower

Answer 10

Borrower - Buy FRA today

Question 11

Interest rate futures

Answer 11

Borrower - buy futures

Question 12

Interest rate traded options

Answer 12

Borrower worried rates will rise, futures price will fall, therefore buy PUT option.

Question 13

Dividend Valuation Method Theory

Answer 13

Shareholders benefit by receiving dividends in future and capital gain on shares.
The PV of these benefits creates the current shareprice.
the share price determined by expected future dividends discounted at required rate of return.

Question 14

CAPM Model theory

Answer 14

• specific risk can be diversified away
• systematic risk can’t be
• company’s beta is calculated from performance of share price against market average and is taken as a measure of the markets view of the risk attached to company in question
• higher perceived risk, higher beta figure, higher equity return

Question 15

Maintaining WACC assumptions

Answer 15

1) Historic debt/equity unchanged
2) Systematic business risk unchanged (i.e no major change in business risk)
3) Finance not project specific

Question 16

APV method

Answer 16

1) Calculate base case value at ungeared cost of equity
2) Calculates the PV of tax shield arising from extra debt
3) Adjusts for issue costs
If APV positive then proceed

Question 17

PE Valuation

Answer 17

Find EPS  (earnings (PAT) / OSC)
Value of 1 share: Times EPS * PE ratio given

Question 18

Enterprise Value

Answer 18

1) find EBITDA
2) Enterprise value = EBIDTA times EV multiplier
3) Net debt = debt less investments
4) Enterprise value less net debt
5) divide by share cap to find value per share

Question 19

g = rb

Answer 19

R = return on equity = PAT / opening net assets 
B = % profit retained = dividend / PAT

Question 20

Dividend yield

Answer 20

dividend per share / dividend yield

Question 21

SVA Analysis

Answer 21

Treat similar to an NPV
Will tend not to have anything in Y0 (except for WC in advance for example)
Discount Y1-Y3 using npv
Then for terminal value, use Y3 closing value, then divide by / (discount rate less growth in revenue)
Combined two values for enterprise value
then less MV of debt
plus investments
then divide by share cap

Question 22

Drawbacks of SVA

Answer 22

-dominated by terminal value, a small change in discount rate or sales growth rate leads to large change in share valuation

Question 23

TERP

Answer 23

Make table, # of shares, price per share = mcap

combine market caps , divide by combined # of shares

Question 24

Traded Interest rates

Answer 24

Borrower worried interest rates will rise, futures
price will fall, therefore buy put option.

Calculate gain on option

Actual interest payment

and premium