risk-free oneyear rate of interest

A manufacture company located in HongKong has entered into a contract to export toys to the USA with delivery in three months. The contract is denominated in USD and is valued at USD 1Million. The spot exchange rate USD/HKD 1.800. Assume that the spot rate in three months’ time is USD/HKD 1.700 and that there is no basis risk between the futures market and the spot FX markets. Set up a hedging strategy using the futures market. Show your calculations (15 points) and explain the outcomes of the strategy. (10 points)

Problem 2 (25 points)

The risk-free oneyear rate of interest is 4%, and the Globalex stock index is at 100. The price of one-year European call options on the Globalex stock index with an exercise price of 104 is 8% of the current price of the index. Assume that the expected dividend yield on the stocks in the Globalex index is zero. You have $1 million to invest for the next year. You plan to invest enough of your money in one-year T-bills to insure that you will at least get back your original $1 million, and you will use the rest of your money to buy Globalex call options. If you think that there is a probability of .5 that the Globalex index a year from now will be up 12%, a probability of .25 that it will be up 40%, and a probability of .25 that it will be down 20%, what is the probability distribution of your portfolio rate of return?

Problem 3 (25 points)

Company XYZ Limited has shares trading at $1.75 per share. XYZ Limited has 826 million shares outstanding. The equity beta of XYZ Ltd is estimated at 1.09. In 2004, XYZ Limited had earnings of $0.17 per share and paid dividends of $0.06 per share.

Ten-year government bonds are yielding 5.4 percent. The market risk premium is estimated at 5 percent.

BALANCE SHEET ($’million)    2004    2003    2002    2001

Assets
Cash & Equivalents    60.30    372.40    156.60    200.20
Receivables Net    253.60    326.20    988.00    984.30
Inventories    164.50    156.30    572.50    617.00
Other Current Assets    2.90    2.30    21.30    37.60
Total Current Assets    481.30    857.20    1,738.40    1,839.10
Property, Plant & Equipment Net    1,340.10    1,357.40    4,137.90    4,273.40
Other Non-Current Assets    333.50    318.10    1,791.40    1,979.00
Total Assets    2,154.90    2,532.70    7,667.70    8,091.50

Liabilities
Accounts Payable    166.70    189.40    563.50    824.20
Short-term Debt    24.30    325.60    104.00    70.10
Other Current Liabilities    219.50    203.80    430.00    311.90
Total Current Liabilities    410.50    718.80    1,219.20    1,320.60
Long Term Debt    200.10    272.70    1,790.70    2,230.00
Other Non-Current Liabilities    399.40    392.40    553.40    459.90
Total Liabilities    1,010.00    1,383.90    3,563.30    4,010.50

Shareholders’ Equity
Common Equity    1,144.90    1,148.80    4,104.40    4,081.00
Total Liabilities & Shareholders’ Equity    2,154.90    2,532.70    7,667.70    8,091.50

INCOME STATEMENT ($’million)    2004    2003    2002    2001

Sales    1,970.80    7,282.90    6,984.70    6,424.00
Cost of Goods Sold    1,294.40    4,122.50    3,984.60    3,716.90
Depreciation, Depletion & Amortization    106.90    471.60    452.90    415.40
Gross Income    569.50    2,688.80    2,547.20    2,291.70
Total Operating Expenses    1,750.50    6,409.40    6,130.80    5,594.10
Operating Income    220.30    873.50    853.90    829.90
Other Income/Expense Net    48.20    1,575.10    96.30    545.60
Earnings Before Interest and Tax    268.50    2,448.60    950.20    1,006.30
Interest Expense on Debt    18.80    105.10    131.70    158.10
Pretax Income    249.70    2,343.50    818.50    848.20
Income Taxes    60.60    266.30    243.70    179.10
Minority Interest    28.90    23.70    22.20    35.00
Net Income    160.20    2,053.50    552.60    634.10

(i)    The Board of XYZ Limited resolves to reinvest the same dollar amount as it did in 2004 into perpetuity. Based on this information, would you recommend purchasing XYZ shares? Justify your answer with calculations. (Assume the return on equity remains constant at the 2004 level in perpetuity)

(ii)    If XYZ Limited’s return on equity declined to a level below the cost of equity, what would be an appropriate financial strategy for the distribution of XYZ Limited’s earnings?

Problem 4  (25 points)

You have compiled the following financial information on Forrester Group Ltd. All financial statement numbers are in millions of dollars unless otherwise indicated. (Table on next page)

Forrester Group’s equity beta is 1.2, the risk-free rate is 5.3% and the market risk premium is 6.0%. Value the stock of Forrester Group Ltd under the following mutually exclusive assumptions.
Hint: The 2003 dividend of 17 cents per share implies a reinvestment rate for 2003, which can be used to work out 2004’s forecast earnings and dividends. The earnings and dividends in 2004 will be the same under all three scenarios.

(a)    The firm reinvests the same percentage of earnings in perpetuity as it did in 2003, and these investments earn 1 percent above the cost of equity capital.
(b)    The firm reinvests the same dollars of earnings in perpetuity as it did in 2003, and these investments earn 1 percent above the cost of equity capital.
(c)    For forecast years 1-5 the firm reinvests the same percentage of earnings as it did in 2003 and these investments earn 1 percent above the cost of equity capital. From then on, the firm earns just the cost of equity capital on new investments.

2001    2002    2003
Statement of Financial Performance of Forrester Group.

Revenue    3,164.8    4,079.8    4,572.0
EBIT    765.7    832.2    985.4
Net interest expense    183.4    172.1    182.4
Pre-tax profit    582.3    660.1    803.0
Income tax expense    154.5    194.9    242.1
Net profit    427.8    465.2    560.9
Average shares on issue (m)    1,705.6    1,878.7    2,034.8
Number of shares at year-end (m)    1,724.3    1,993.4    2,056.3
Dividends per share (c)    14.5    15.5    17.0

Balance Sheet

Assets
Current assets    1,367.1    2,230.8    2,641.2
Non-current assets    3,734.3    7,018.7    6,869.8
Total assets    5,101.4    9,249.5    9,511.0
Liabilities
Interest-bearing current liabilities    473.1    365.3    237.1
Other current liabilities    543.4    1,060.6    1,459.8
Total current liabilities    1,016.5    1,425.9    1,696.9
Interest-bearing non-current liabilities    1,535.6    3,715.6    3,148.3
Other non-current liabilities    241.5    329.0    453.9
Total non-current liabilities    1,777.1    4,044.6    3,602.2
Total liabilities    2,793.6    5,470.5    5,299.1
Net assets    2,307.8    3,779.0    4,211.9
Equity
Contributed equity    1,871.2    3,151.1    3,445.5
Reserves    234.6    134.0    61.6
Retained profits    202.0    493.9    704.8
Total equity    2,307.8    3,779.0    4,211.9

Assignment 2 : Stock markets and Derivatives

I need this assignment by 20th July 2014, by 4PM

Problem 1 (25 points)
Listing on a stock exchange might be highly desirable for a company, but there are a number of requirements, conditions and costs associated with becoming a publicly listed corporation.
1)    Identify and explain 10 specific requirements that must be met by an Australian company seeking general admission to the ASX. (10 points)
2)    Discuss the ASX profit test and asset test requirements and explain why these riles are in place. (10 points)
3)    Identify and explain the different costs that a company will have to meet in the process. What impact will these have on the liquidity management of the firm? ( 5 points)
(Hints: just dot points answers will be fine)

Problem 2 (25  points)
On your first day of trading in Vietnamese forward contracts, you observe that the share price of Giap Industries is currently 54,000 dong while the one-year forward price is 60,000 dong. If the yield on a one-year riskless security is fifteen percent, are arbitrage profits possible in this market? (Show your calculation) (10 points)      If not, explain why not. If so, devise an appropriate trading strategy. (15 points)

Problem 3 ( 25 points)
A fund manager forecasts that it will need to invest $1 mill in approximately 90 days. The manager wishes to receive a return as close as possible to the medium interest rates currently available, but expects that the rates will have fallen by the time the funds are available for investment.
1)    Outline what the manager would do today in the financial futures market in order to secure a return that is close to current medium term markets rates. (8 points)
2)    Calculate the price of a three year treasury bond futures quoted at 95.25 (6 points)
3)    Outline how fund manager would close out the futures market position. (6 points)
4)    Outline and explain the factors that will determine how successful this strategy will be securing an effective return that is close to today’s market rates. (5 points)

Problem 4 (25 points)
1)    A company knows that it will need to borrow $500,000 in six months’ time and is concerned that interest rates may rise before that date. The company wishes to protect itself against a rise in interest rates and decides to use an options collar strategy. Explain how a collar strategy is structured and why the company might consider this type of strategy. (15 points)
2)    There is an expectation of increasing price volatility in the market due to the lingering effects of the GFC (Global Financial Crisis), problems with the world economy and concerns about sovereign debt. Design an option strategy that will enable a profit to be locked in, regardless of future direction of asset prices. ( 10 points)

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