Explain the following questions
You are required to demonstrate trading strategies and instruments that would be appropriate to exploit price efficiency/inefficiency during the process of acquisition. Your analysis should forecast possible trading profit going forward until the appropriate cut-off date. (40%) 1) Drawing on the insights from previous section, describe the type of trading strategies and risk management tools intended for the event and your design principle for using these tools based on the result of event analysis 2) Demonstrate, using relevant trading instruments for the type of strategy used, e.g. long- short strategy and calculate total return from such strategy. 3) Calculate relevant statistics to demonstrate understanding on volatility and correlation amongst the trading pairs. 4) Illustrate how to avoid adverse price movement as a result of (a) unexpected down side movement for the long position; (b) unexpected up side movement for the short position; and the characteristics of the type of instrument used to hedge risks. 5) In retrospect, how to use (3) in combination with (2) to maximise profit13. Assume that you plan to construct a portfolio aimed at achieving your stated objectives. The portfolio can be constructed by allocating your money to the following asset classes: common stock, bonds, and short-term securities. a) Identify state and comment your investment objectives. b) Determine an asset allocation to these three classes of assets considering your stated investment objectives. Explain your decision. c) What reasons could cause you to make changes in your asset allocations? 14. An investor's portfolio consists of 50000 EURO in stocks and 5000 EURO in cash the Beta of the portfolio is 1,10. How the investor could reduce Beta of the portfolio to 0,957 Show and explain. 15. Select four stocks which were actively traded in the local stock exchange last calendar year, find the information about their prices at the beginning and at the end of the year, amount of dividends paid on each stock for this year and stock Beta at the end of the year. Also find a risk-free rate of return and the market return for the given year. Assume that these four stocks were put to the portfolio in equal proportions (25% in each stock). Assume that the standard deviation for this portfolio is 16, 75% and that standard deviation for the market portfolio is 13, 50%. a) Find the portfolio return for the given year (see chapter 3.1.2, formula 3.1). b) Calculate Sharpe's, Treynor's ratios and Jensen's Alpha. c) Compare and comment the results of measuring portfolio performance with different measures.Question 3 Value a 1.5-year swap, with swap rate 5.52%. The floating leg is referenced to the 6-month LIBOR, which is at 6% per annum. Notional is 100 million. Use the following discount factors: T Z(0, T) 0.25 0.9848 0.50 0.9745 0.75 0.9618 1.00 0.9490 1.25 0.9353 1.50 0.9215 You are told that this swap is at initiation. What is the payment frequency of the fixed leg on the swap, quarterly or semiannually? Please show all assumptions and calculations. Question 4 Consider the same swap as in Question 3. What is the value of the swap three months after initiation, where the discount factors are now: T Z(0, T) 0.25 0.9840 0.50 0.9680 0.75 0.9520 1.00 0.9360 1.25 0.9190 1.50 0.9040Question 4 Assume a Modigliani-Miller (MM) world. Gemini Ltd. is an all-equity firm with 10 million shares outstanding. Its only asset is $100 million of cash invested in the risk-free asset, which pays 10% per year. Gemini can invest $50 million of its cash today into one of two mutually exclusive projects, A or B. Project A is expected to generate a perpetual stream of free cash flows, starting with $13.5 million in exactly one year, thereafter growing at an expected rate of 3% per year. Project B, also perpetual, is expected to produce a free cash flow of $10 million in exactly one year's time, growing at an expected rate of 5% per year thereafter. The risk of both projects is diversifiable. State any additional assumptions you may need to make when answering the question. Show all working and calculations. Required: a) Calculate the NPV and IRR of each project. If the NPV and IRR rankings disagree, explain the source of the conflict. (5 marks) b) Which project should Gemini choose? Why? (4 marks) c) Assume Gemini invests in project B. What is the firm's new share price after Investment? (2 marks) After taking project B, Gemini considers acquiring Leo Corp., an all-equity firm with 20 million shares outstanding, currently trading at $2 per share. The difficulties of integrating disparate organizations means the synergies from the acquisition are uncertain. With probability 60%, integration will be successful, in which case the value of Leo's assets will improve by 30% under the new management. However, if the merger is implemented poorly (probability 40%), the acquisition will destroy 20% of Leo's asset value. Remember that information in an MM world is symmetric - insiders at firms and in the market are equally informed about the synergy outcome, which will only be revealed after the acquisition is completed. Assume managers always act in the interest of existing shareholders and that all participants are risk-neutral. Also assume that in any takeover, 100% of target shares are acquired by the bidder. d) Assume Gemini does not have to pay a premium to acquire Leo. Advise Gemini on the merits of the acquisition. If it financed the takeover using shares in the combined entity, how many shares will Gemini need to offer for each Leo share? Would Gemini's shareholders be better off (in expectation) if the acquisition was financed using cash from the company accounts instead? Explain
