AKU612 - INVESTMENT ANALYSIS AND PORTFOLIO MANAGEMENT - APRIL 1995.

(1)

UNIVERSITI

SAINS

MALAYSIA

Second Semester Exarnination Academic Session 1994195

April

1995

AKU6I2 - INVESTMENT ANALYSIS AND

PORTFOLIO

MANAGEMENT Time :

[3 ^hours]

INSTR,ITCTION :

Please rnake sure rhat this examination paper consists

of SIX

(6) printed pages before you begin.

This paper _comprises

SIX (O

questions. Answer only

IIIVE

⁽⁵⁾questions.

Ouestion

l (a)

(1)

(iii

(c) (b)

Define

mathematically the equation

for

the

profit from a put. Draw

the payoff diagram

for

a long position

in

a put option.

Explain how a covered

call or

a protective put protects a long position

in

a stock.

[5

^marks]

What

are

the f;ve

variables found

in

the Black-Scholes option

pricing

_model_and what is the effect

of

each variable on the option

price? r r

[5

^marks]

The

time to

expiration

is.90

days, the exercise price

is

$90 and the stock

price

is

$100.

The standard deviation

is .8

and the continuously compounded

risk -

free rate

is 9 per cent"

Using the Black

-

Scholes option

pricing

_model,_calculate_the theoretical value

of

(i)

a put _and

(ii)

a call

[5

^marks]

r37

.

..2t-

(2)

(d)

AKU612

-2-

The

following

information is given ^:

Exercise Price Call Price Put Price

$60 $12 $+

Instead

of buying l{F

shares

of

Jones Corporation comnnon stock

with

a closing

price of

$65 on 31st.

November,

Mr

Snnith decides

to buy a

Jones Corporation

option

instead, What are

Mr.

Smith's profits and rates

of

return

if

(i)

he buys a

call with

an exercise price

of

$60 and the stock ends up at $70?

(ii)

he buys a put

with

an exercise price

of

$60 and the stock ends up at $40?

[5

^rnarks]

Ouestion 2

{a)

^Define^basis

risk,

^cost

of

^carryand cross hedging.

&) What are the

characteristics

of the interest tate

futures index futures contracts?

[5

^marksJ contracts

and the

stock

[5

^marks]

(c)

SPOT

Jul 15 A

^harvest

of 20,ffi0

bushels

of

com is expected

in

late

August.

The farmer is worried that the price

of

corn

in

early September

will

not be high enough to cover production costs.

Sep

5

^The^spot^price

of

^the^corn^is

$3.20.

^{The corn}^can^{be sold}

for

^20,000

(3.20)

:

_$64,000.

Required :

Specify the hedging strategy

for

this forecasted crop using futures contracts to lock

in

the effective price

of

$3.30

at

which the crop

to

be harvested

in

the future

will be sold. [Additional information : Each corn

^futures

contract covers

5,000

bushels. The

sale

price per

bushel

for

the

corn

futures contract

is $3.40.

^The

spot price converges to $3.21, approximately the futures price on 5 Septemberl

[5

^marks]

...3t-

(3)

(d)

-3-

Describe

a

^hedge

for a

long position

in

Treasury bonds ro increase

in

interest rates.

AKLJ6I2

hedge

an

unexpected

[5

^n:arksl

Ouestion 3

(a)

Discuss the assumptions and trie advantages

of

technical _analysis.

(b)

Explain the following:

(i)

Contrary opinion rules

(ii)

Breadth

of

market trneasures

(iii)

The Dow Theory

(iv)

Support and resistance levels

(v)

Point and figure charts.

[5

^marksJ

t l -5 nrarksl

O-uestion 4

Discuss the methods for:

(a)

Estirnating the future _earningsper _share

for

the stock rnarket series ancJ

(b)

Estimating the expected earnings rnultiplier.

[20 ^rnarksJ

Owstiqn:

(a)

Discuss the fbrecasting

of

interest rafes based on tire prernise that the price

for

loanable funds.

(b)

{c)

what

are the fundamental factors that determine interest rates?

Discuss the term structure

of

interest rates.

(d)

Define the rnajor categories

of

yield spreads.

lnterest _{rates are}

[5

^nrarks]

[5

^rnarks]

[5

^marks]

[5

^nrarksJ

.. "4t_

r$e

(4)

.

^AKU612

-4-

Question 6

"The Capital Asset Pricing Model (CAPM)

postulates

a linear relaiionship

between expected return and beta".

Discuss

this

statement and compare

CAPM with

the

Markowitz

mean-variance

portfolio

theory'

t2o ^marksl

...5t-

(5)

AKUS I 2

-5-

Appendix A

List of

Formulas

1. c(t) :

_S(t)

N

_{(d )}

I

-r(T-t)

XeN (d)

2

J

J.

4.

-r(T-0

p(t) : xe (l-N(d )) - s(r) tt-N(d )I

(l+

R 1/N

tn ; = [(1+

^t

)(1+ r )...

r+1

¹

(1+ r )l

t*n-l

^I

R I

(1+ R

₎

n*1

r=tn*l t*n lt

(r+ R

₎

tn

5.

r =J

r+n jt

(1+ R ) n+j

r n+j

-1

6.

(1+

R

UN

tn ) - [(1+R)(1+ r +L)

11 r+1 |

²

(l+ r *

r+-N-1

I

L)l

n

7. E(R) :

I

ttrlE(R

) -

RFRI m

RFR +

141

(6)

- 6-

AKIJ6I.2

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- oooOooo -