QUES TION 2 (DERIVATIVE SECURITIES) a) A fund manager has been monitoring the perfcmnance of Virgin Galactic Corporation shares (NYSE: SPCE). The shares are currently trading at $34.8 on the New York stock exchange. The fund manager predicts that SPEC shares might rise In value over the next few months. He checked the market and found the related lnfonnatlon on the options with a maturity of two months as below. Assume the number of underlying shares per contract Is 50 shares. (I) Please specify the moneyness of the following options. Are they In the money, at the money or out of the money? [3 marks] strike Call premium Moneyness Put premium Moneyness $30 $3.05 $2.33 $34.5 $3.9 $4.5 $38 $3.2 $3.7 (II) Which option would you suggest the fund manager to purchase? Why? [2 marks] (III)How much would It cost If the fund manager purchases options In ii that cover 1,000,000 shares (II)? [1 marks] b) A superfund manager currently manages a diversied Australian shares portfolio with a value of $300 million. The manager decides to use the ASX SPI 200 index futures to hedge a forecasted decline In share prices. As an analyst In the team. you have calculated that the share portfolio requires 2100 futures contract to manage the risk exposure. Assuming SGPIASX 200 Index ls currently at $5,500 and one Index point Is $25. (I) Explain to your manager the action your team should take In futures contracts and the total value of futures contracts [3 marks] (II) In three months' time, the manager decides to close out the hedging position. Assuming the SGPIASX 200 Index Is at $5,150 at that time. Explain how you will close out the open position and show the net valuation effect of the hedging strategy. [3 marks] (usuzmarks) QUESTION 3 a) b) (EQUITY CAPITAL MARKETS) Bharti Airtel plans to expand its network and prepare for the launch of 56 services. The board had approved raising up to (21,000 crore by issuing additional ordinary shares to its existing shareholders on a pro-rata basis of one new share for each fourteen equity shares of Bharti Airtel. The nancial advisers to the corporation have recommended the use of an underwriting facility. Using this information, answer these questions. (i) What type of issue is Bharti Airtel making to its shareholders? What are the features of this type of issue? [3 marks] (ii) What is an underwriting facility, and why might Bharti Airtel use such a facility? [2 marks] Rio Tinto Limited has decided to sell its shale coal part of the business by establishing a new limited liability company to be known as Shoal Limited. Shoal Limited will be a listed corporation on the ASX. Rio Tinto and Shoal decide to issue the new shares at 52.65. (i) Shoal Limited willbe a limited liability company. What are the rights and nancial obligations of shareholders that purchase shares in the company? [2 marks] (ii) One year later, Shoal Limited plans to expand its operations and seek to raise capital to do so. The company advisers recommend that the board of directors choose between a private placement or initial public offering. Explain each of these funding alternatives and discuss the advantages and disadvantages of each alternative. [3 marks] (5+ 5= 10 marks)