Question
A financial engineer is anticipating that Nestle shares would be selling higher over the next five years at an average rate of 28% per annum.
A financial engineer is anticipating that Nestle shares would be selling higher over the next five years at an average rate of 28% per annum. With this inside knowledge, he approached a major shareholder who is willing to loan him 10,000 shares to be returned in five years at a rate of 22% per annum compounded quarterly - which is 2% more than the anticipated average market rate for Nestle shares over the loan period. Assume currently a share of Nestle is worth Ghc 25 on the Ghana Stock Exchange. i. What are the interests to be earned by the owner of the shares at the end of year five from lending 10,000 of her shares to the financial engineer and keeping her shares on the GSE? ii. What is the extra amount that should be paid to the shareholder upon return of the 10,000 shares after five years? iii. If the true average rate for Nestle shares over the loan period turns out to be 15% per annum, what is the total amount of losses that will be incurred by the financial engineer? iv. If the true average rate for Nestle shares over the loan period turns out to be 30%, what is the total amount of gains that will accrue to the financial engineer? v. From (iv) how much (in monetary terms) did the financial engineer outperform his own projections?
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