17. AZ Corp. sold USD10,000,000 against GBP forward at a forward rate of £0.8200 for $1 at Time 0. The current spot market at Time t is such that $1 is worth £0.7600, and the annually compounded risk-free rates are 1.00% for the British pound and 3.00% for the USD. Assume at Time t the forward contract has one month to expiration. The value of the foreign exchange forward contract in ₤ at Time t will most likely be:
26. PSO and NRL stocks are currently priced at PKR 250 per share. Over the next year, PSO stock is expected to pay dividends whereas NRL stock is not expected to pay dividends. There are no carrying costs associated with holding either stock over the next year. Compared with PSO, the one-year forward price of NRL is most likely:
5. A non-dividend paying stock is trading at €100. A European call option on this stock has two years to mature. The periodically compounded risk-free interest rate is 3%, the exercise price of the option is €100 . The up factor is 1.25, and the down factor is 0.80. The risk- neutral probability of an up move is 0.51. The call option value is closest to:
Andy Dimon, a fixed income analyst at a hedge fund, is responsible for pricing individual securities and identifying arbitrage opportunities in the market. Dimon is familiar with the process of stripping whereby individual cash flows of a government bond are traded as zero- coupon securities. He therefore, evaluates government bonds that have been stripped. Currently Dimon is assessing a 3% annual-pay government bond maturing in three years quoted in the market at $102.85. Dimon uses the data given below to value the bond:
20. C is correct. The price of each depository receipt (and returns) will be affected by factors that affect the price of the underlying shares, such as company fundamentals, market conditions, analysts’ recommendations, and exchange rate movements. The ratio of depository receipts to underlying shares does not impact return.
27. A market participant has a view regarding the potential movement of a stock. He sells a customized over-the-counter put option on the stock when the stock is trading at $46. The put has an exercise price of $44 and the put seller receives $2.5 in premium. The price of the stock is $43 at expiration. The profit or loss for the put seller at expiration is:
31. Company A and Company B, each have bonds outstanding with similar coupons and maturity dates. Both bonds are rated B1, B+, and B+ by Moody‘s, S&P, and Fitch, respectively. The bonds, however, trade at very different prices — Company A bond trades at $78, whereas the Company B bond trades at $62. What is the most likely explanation of the price difference?
9. Elena is the owner of a textile company in London. Her company has recently generated revenue by selling jeans to a customer in Pakistan and will be paid in Pakistani Rupees (PKR) in ninety days. Elena is concerned about the possibility of the PKR depreciating more than expected against the UK Pounds (GBP). Therefore, she is planning to sell three-month futures contracts on the PKR. The seller of such contracts generally gains when the PKR depreciates against the GBP. If Elena takes a short position in these future contracts, she would most appropriately be described as a(n):
7. B is correct. Management compensation does not directly impact the government's interest as a stakeholder. Being a tax collector, the government is interested in the company's profits whereas as in order to safeguard the interests of the public the government would want to ensure the environmental impact of the business's activities is not negative.
42. C is correct. QE is an unconventional approach to monetary policy and is operationally similar to open market purchase operations, but conducted on a much larger scale. The idea is that additional reserves created by central banks would kick-start lending, which would eventually lead to an increase in real economic activity.
9. Jane Norah is an analyst for a midcap growth fund. The fund earns a quarterly return of 4.5 percent relative to an estimated return of 6.0 percent. If Norah wishes to test whether the actual results are different from the estimated return of 6 percent, the null hypothesis is most likely:
28. At the beginning of the year a company purchased a fixed asset for $2,000,000 with no expected residual value. The company depreciates similar assets on a straight-line basis over 20 years, while the tax authorities allow declining balance depreciation at the rate of 10% per year. In both cases the company takes a full year’s depreciation in the first year and the tax rate is 30%. Which of the following statements concerning this asset at the end of the year is most accurate?
28. B is correct. In an inefficient market, investors might be able to earn superior risk adjusted returns since opportunities for it exist in the market e.g. due to mispricing. However, in an efficient market a passive investment strategy would be preferred to an active strategy for its lower costs and because opportunities for earning superior risk adjusted returns in an efficient market are negligible.
37. A project with an initial investment of 50 has annual after-tax cash flows of 20 for four years. A project reengineering initiative decreases the outlay by 15 and the annual after-tax cash flows by 10. Consequently, the vertical intercept of the NPV profile of the reengineered project shifts:
2. B is correct. Technical Analysis is based on trading data of security. This includes the price and volume data of past. The detail about the type and features of the security is not relevant for technical analysis. Financial Ratios are used in fundamental analysis and it does not have any application to the technical analysis.
33. A portfolio manager had invested a total amount of $300,000 in stocks and fixed income instruments at the start of the year. Equity investments represented 60% of the portfolio and generated year-end return of 35%, whereas the fixed income instruments yielded 15%. The correlation of stock returns with fixed income instruments‟ returns was found to be 20%. Based on the given data, the portfolio return would be closest to:
5. B is correct. Measuring willingness to take risk (risk tolerance, risk aversion) is an exercise in applied psychology. Instruments attempting to measure risk attitudes exist, but they are clearly less objective than measurements of the ability to take risk. Ability to take risk is based on relatively objective traits such as expected income, time horizon, and existing wealth relative to liabilities.
35. C is correct. In first-degree price discrimination, a company is able to charge each customer the highest price the customer is willing to pay. In second-degree price discrimination, a company offers a menu of quantity-based pricing options designed to induce customers to self-select based on how highly they value the product. The scenario given in the question is an example of third-degree price discrimination where customers are segregated by
61. Maxtax Inc. has issued semiannual $1,000 par value Floating Rate Note with 4 years to maturity, the reference rate is 180-day LIBOR and the quoted margin is 75 basis points. 180- day LIBOR is currently quoted at 5% and the margin for discount is 91 basis points. What is the most likely value of this FRN?
15. A private equity fund has committed capital of $150 million, carried interest of 20% and a hurdle rate of 8%. It makes an investment in target company A of $50 million and in company B of $50 million at the beginning of year 1. It exits from both investments a year later with a $10 million profit in company A and realizes a loss of $5 million in company B. The GP is entitled to carried interest on a deal-by-deal basis. What is the carried interest paid to the GP on each deal?