Question 1

When it comes to sourcing long term financial resources, a company can issue two types of securities: bonds or shares.

(a) Assess the benefits and disadvantages of each of these sources of financing.

(5 marks)

(b) Preference shares and convertible bonds are both called hybrid instruments. Explain how they are structured, and assess the similarities between them and why they are characterised as hybrid.

(7 marks)

(c) Discuss the impact of a rise in interest rates on bonds and shares.

(5 marks)

Question 2

(a) Assess the differences between a commercial bank and an investment bank.

(7 marks)

(b) Download the 2015 annual report of UOB and Morgan Stanley UK at the links below.

Show how the differences established in part (a) are reflected in their respective balance sheets and income statements.

http://www.uobgroup.com/AR2015/pdf/UOB_Annual_Report_2015.pdf

https://www.morganstanley.com/about-us- ir/pdf/MSIP_Group_Accounts_31_December_2015.pdf

(10 marks)

Question 3

April 1st 2016 As a treasurer of Bright Fortune Ltd, a Singaporean company operating in Singapore but with USD as a functional currency, you just signed a 5-year loan with DBS where you borrow 10 million USD at a rate of 1-year Libor + 200 bps (basis points). The 1- year Libor rate on April 1st 2016 is 0.75%.

However, since the beginning of the year, there has been persistent market expectations that the US Federal Reserve might intensify its raising of short term interest rates from their historically and abnormal low level.

(a) Calculate where possible the amount of interest that you will pay to DBS.

(2 marks)

(b) Analyse the risks (or lack thereof) that the loan exposes Bright Fortune to.

(5 marks)

(c) Formulate a strategy using swaps to hedge this risk.

(7 marks)

Question 4

Ozfood Pty Ltd, a cookie manufacturing company based in Sydney, has received an order today, i.e. 7 October 2014, to sell 10,000 boxes of its best-selling product to a Japanese client.

The amount to be paid by the client is 3.45 million AUD, but the invoice needs to be issued in Japanese Yen (JPY). At todays FX price of 1 AUD = 100 JPY, the amount invoiced is therefore 345 million JPY and will be payable on January 7th 2015.

AUD/JPY Forward Rates
Period	Bid	Ask
1 Month	99.90	99.94
2 Months	99.80	99.85
3 Months	99.75	99.78
6 Months	99.55	99.59
12 Months	99.25	99.28

Laurie, Ozfoods treasurer, is considering whether to hedge her receivable or not, and has received the following quotations from her bank:

AUD / JPY Options Expiry in 3 months (American options) Premium in JPY per AUD
CALLS (AUD Call / JPY Put)	Strike Price	PUTS (AUD Put / JPY Call)
5.5	98	1.5
3.8	99	1.7
2.2	100	2.2
2	101	3.9
1.8	102	5.8

(a) What is the risk for Ozfood on this transaction?

(2 marks)

(b) From the list of prices given above, select and describe an appropriate forward transaction and an appropriate option transaction that Laurie should enter to hedge her position.

(5 marks)

(c) Using the transaction selected above, compare the net proceeds in AUD received by Ozfood under the various hedging strategies (do nothing, forward and option) when AUD/JPY on 7th January 2015 is 98, 100 or 103. Results must be presented in the table below.

Do Nothing / without hedge	Forward	Option
Hedge transaction	None	- -	- -
Spot AUD/JPY	Formula for Net AUD Proceeds	Net AUD Proceeds	Formula for Net AUD Proceeds	Net AUD Proceeds	Formula for Net AUD Proceeds	Net AUD Proceeds
98
100
103

(10 marks)