Final Exam 2 PDF

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FINAL EXAM

EXAM DETAILS Course Code: Course Description: Exam Date Release time: Submission cut off time: Exam Duration: Total number of pages:

BAFI 1002 Financial Markets 18/06/2020 14:00, Melbourne Time 16:30, Melbourne Time 2 hours + 15 min reading time + 15 additional minutes for download and submission pages 8

INSTRUCTIONS TO CANDIDATES 1. The assessment consists of a series of 5 questions. You must complete all questions and each component of the question. The assessment is worth a total of 50 marks. 2. This is an OPEN BOOK assessment. 3. You are expected to answer the questions within the scope of the topics covered in this course. 4. Please use a word document to write your answer. Please clearly label each question and each part of the question. This exam paper adds to 50 marks and comprises 50% of the total marks allocated 5. in this course. To obtain a pass in this course, you must achieve at least 50 % overall in course assessments

Submission:

BAFI 1002 Financial Markets Exam, Semester 1,2020

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Write your answers in a separate word document. Ensure that you include the 1. following information along with the cover sheet: Student Name ____________________________ Student Number ____________________________ This assessment must be submitted electronically via Canvas as a word document only and must constitute your own work. Submission for this assignment is via Turnitin; therefore, it is automatically checked for any form of plagiarism, 2 resulting in academic misconduct if plagiarism occurs. You are required to upload the file as a word document only; not as pdf. If the file is uploaded in any other format that is not recognised via Turnitin and you don’t receive a similarity score – the assessment will not be marked and a grade of zero for the assessment will be applied. As this is a final assessment, late submissions will not be accepted. If circumstances occur that prevent you not being able to undertake the assessment on the due date – you will have to apply for special consideration: This webpage 3 provides instructions about how to go about this: https://www.rmit.edu.au/students/student-essentials/assessment-andexams/assessment/special-consideration The submission window will close exactly at the cut-off time. Please submit before the cut-off time to ensure that nothing impedes your ability to upload the 4 assessment, such as internet/wifi issues. This will not be a sufficient excuse to grant extensions – you are responsible for ensuring that you are able to submit the assessment on time. Answer Requirement: 1 Where mathematical calculations are required, you must state the equation used as well as each step in your calculations. You may use hand-drawn diagrams where applicable. Include the image of the 2 diagram - use balanced resolution so the information in the image is readable (not blur). If the solution is not readable, no marks will be awarded. 3 Please use a Word document to write your answer. Please start each question on a new page and clearly label each question and each part of the question. BAFI 1002 Financial Markets Exam, Semester 1,2020

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The format is detailed below: 

Font type: Arial

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Font size: 12pt (14 for headings)

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Spacing: 1.5 line spacing

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Page No: Page x.

Assessment Declaration

This is an individual piece of assessment. That means it must be your own work and you can’t copy or have someone else complete any part of the work for you. By submitting this assessment, you are declaring that you have read, understood and agree to the content and expectations of the Assessment declaration.

This exam comprises of 5 questions with multiple parts. Each question is worth 10 marks. Answer all 5 questions and all parts of each question. QUESTION 1

BAFI 1002 Financial Markets Exam, Semester 1,2020

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Your friend Mark is quite worried about the recent volatility in equity markets due to the current health pandemic and is thinking about investing in the bond market. He contacts you to seek your advice on bond markets. You have undertaken some research and find the following information regarding yield on different bonds. (i) 1.8% current one-year bond (ii) 1.9% expected one-year bond rate in 24 months’ time (iii) 1.93% three-year bond rate

REQUIRED: a) Using the pure expectations theory advise your friend on the yield he should expect on a one-year bond in 12 months’ time.

b) Identify and explain to your friend two assumptions of the pure expectations theory that are challenged by the segmented markets approach to interest rate determination.

c) Your friend has heard that inflation is anticipated to rise significantly over the next few years. Explain to him what effect would this expected rise in inflation have on the slope of a normal yield curve? Also, what effect, if any, this change in inflation will have on the value of his bond investments?

(2 + 4 + 4 = 10 marks)

QUESTION 2 a)

You work as a junior treasury analyst at First Plan Ltd. Due to the developments in the financial markets in lieu of the COVID-19 situation, your company decided to liquidate its long-term investments and look for profitable opportunities in the money market. You were BAFI 1002 Financial Markets Exam, Semester 1,2020

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assigned the responsibility of undertaking money market trades. Consequently, you contacted Gotham Bank and bought 90-day bank bills at the following rates: bid / ask: 3.23 / 15 After 21 days you called Metropolis Bank and sold these bank bills at the following rates: bid / ask: 3.50 / 42 If the face value of the bank bills is $100,000 calculate the dollar value of profit earned over the 21-day holding period.

b)

The Reserve Bank Australia is conducting expansionary monetary policy in an attempt to stimulate the Australian economy. Using the loanable funds model, explain to your senior manager how the expansionary monetary policy can be implemented using open market operations and its impact on the supply of and demand for loanable funds, and the interest rate in Australia.

c)

Explain to your manager the role of a discounter in bank accepted bill facility. What is the liability, if any, of a discounter?

(4 + 3 + 3 = 10 marks)

QUESTION 3 Term Currencies

Commodity Currencies

AUD

USD

AUD

1

0.6814*

USD

1

GBP

1.28

GBP

age 5 of 8

1

†

USD is the USD dollar; GBP is the British Pound and AUD is the Australian dollar * Read it as AUD/USD = 06814 (1 AUD buys 0.6814 USD)

a)

With the help of the given exchange rates, complete the table above. Copy the table into your answer document.

b) Identify and explain at least two disadvantages that may be associated with maintaining a fixed exchange rate regime.

c) You work as a commercial lending manager at the National Australia Bank and have a meeting scheduled with an Australian business client. The business client operates in the garment sector and imports cotton from the United States that is paid for in US dollars. The client wishes to discuss how the recent fall in prices of major commodities exported by Australia may influence the value of the Australian dollar and the cost of doing business for the client. Explain to your client how the decline in commodity prices may influence the value of the Australian dollar relative to the US dollar and its impact on the cost of cotton imports from the US (4 + 3 + 3 = 10 marks)

QUESTION 4 a) You work as a Corporate Risk Analyst at JP Morgan. You clients Peter and Angela are planning to start a new company and have come to you for advice. Angela is worried that company’s managers may serve their own personal interests rather than maximizing the BAFI 1002 Financial Markets Exam, Semester 1,2020

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revenues of the company. Explain to Angela what this problem is called and prescribe one way of dealing with this problem.

b) Angela is unsure about the appropriate mix of debt and equity for the new firm. Explain to her the main criterion that corporations use to determine the appropriate debt-to-equity ratio.

c) Peter purchased bonds issued by Lipo Limited with a face value of 200,000 and a yield of 1.4 per cent per annum at the time of issue. The bonds pay a fixed coupon rate of 2.5 per cent per annum payable on a half-yearly basis. The bonds were issued with a term to maturity of seven years. Exactly one year has elapsed. Peter is concerned that Lipo is not progressing well and wants to sell his investment in the company. The bond is currently trading a yield of 1.8 per cent per annum. What is the current price of the bond? Show detailed calculations.

(3 + 3 + 4 = 10 marks)

QUESTION 5

BAFI 1002 Financial Markets Exam, Semester 1,2020

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As a hedge fund manager, you have a bearish view on BHP shares for the following 2 months given the uncertainties related to Covid-19. BHP Ltd’s share is currently trading at $36.00 per share. The two-month put option on BHP share with an exercise price of $32 per share is selling at $1.5 (premium) per share. The two-month call option on BHP share has an exercise price of $32 per share and is selling at $2.0 (premium) per share REQUIRED: a) Calculate the cost of purchasing put options on 500,000 BHP shares b) Determine the share price for BHP shares at which the decision to purchase the above put options effectively “breaks even” for the fund manager. c) Suppose you don’t own any shares, but you still want to make profits during this period. How can you use both put and call options to take advantage of the fall in the share price? d) What are the risks, if any, associated with the trading strategy prescribed in part c)

(2 + 2 + 4 + 2 = 10 marks)

END OF EXAM

BAFI 1002 Financial Markets Exam, Semester 1,2020

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