FM General Flashcards
Forward Exchange: UK Exporter
Right side of split, if premium subtract. ADD if discount.
Forward exchange: UK importer
Left side of split, if premium subtract. Add if discount.
MM Hedge: UK Importer (FC payment in future)
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
MM Hedge: UK Exporter (FC receipt in future)
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.
Currency futures: UK exporter (FC receipt in future)
- 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
Currency Futures: UK importer (FC liability in future)
-Sell pound futures now
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Traded Options: UK importer (FC liability in future) , pound options
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
Traded Options: UK importer . Rupee options
Call option on rupees since want a right to buy them at a set price in x months.
OTC Options on Pounds: UK Exporter
Call option on pounds since buying pounds in future with FC.
Interest rates FRA’s - borrower
Borrower - Buy FRA today
Interest rate futures
Borrower - buy futures
Interest rate traded options
Borrower worried rates will rise, futures price will fall, therefore buy PUT option.
Dividend Valuation Method Theory
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.
CAPM Model theory
- 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
Maintaining WACC assumptions
1) Historic debt/equity unchanged
2) Systematic business risk unchanged (i.e no major change in business risk)
3) Finance not project specific
APV method
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
PE Valuation
Find EPS (earnings (PAT) / OSC) Value of 1 share: Times EPS * PE ratio given
Enterprise Value
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
g = rb
R = return on equity = PAT / opening net assets B = % profit retained = dividend / PAT
Dividend yield
dividend per share / dividend yield
SVA Analysis
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
Drawbacks of SVA
-dominated by terminal value, a small change in discount rate or sales growth rate leads to large change in share valuation
TERP
Make table, # of shares, price per share = mcap
combine market caps , divide by combined # of shares
Traded Interest rates
Borrower worried interest rates will rise, futures
price will fall, therefore buy put option.
Calculate gain on option
Actual interest payment
and premium
