Section A: Multiple-Choice Questions [20 Questions; 40 Marks] 1. Which one of the following is not a key market risk? A. Equity price risk B. Commodity price risk C. Credit risk D. Foreign exchange rate risk 2. In recent months, Nedbank warned that its bad loans would stay elevated for the rest of the year. This is because inflation, high interest rates, and regular local blackouts are leading to defaults. Which type of risk is Nedbank exposed to because of this scenario? A. Counterparty risk B. Interest rate risk C. Inflation risk D. Market risk 3. South Africa is currently experiencing a severe energy crisis which has widespread effects on businesses and the economy at large. This load shedding or energy crisis exposes businesses to which type of risk? A. Credit risk B. Liquidity risk C. Operational risk D. Model risk 4. Suppose two portfolios have the same average return and the same standard deviation of returns; however, portfolio A has a higher beta than portfolio B. According to the Treynor measure, the performance of portfolio A: A. is better than the performance of portfolio B. B. is the same as the performance of portfolio B. C. is poorer than the performance of portfolio B. D. cannot be measured as there is no data on the alpha of the portfolio

5. Suppose the rate on Treasury bills is 4%, and the return on the market portfolio is 11.50%. The beta of a managed portfolio is 1.2, and the average return is 14%. Based on the Jensens measure of portfolio performance, the alpha of the managed portfolio is: A. 1.00% B. 1.30% C. 13% D. 14% 6. You want to evaluate three mutual funds using the Sharpe measure of performance evaluation. The risk-free return during the sample period is 6%. The average returns, standard deviations, and betas for the free funds are given below, as are the data for the JSE All Share Index. Identify the best performing fund based on the Sharpe ratio. Average return Standard deviation Fund A 24% 30% Fund B 12% 10% Fund C 22% 20% JSE All Share Index 18% 16% A. Fund A B. Fund B C. Fund C D. Funds A and B tied for the best. 7. Consider two bonds, A and B. Both bonds are currently trading at their par value of R1000. Both bonds have a maturity of 5 years. Bond A pays a coupon of R120 annually, and Bond B pays a coupon of R90 annually. If the yields to maturity on the two bonds change from 12% to 14%, ___________________. A. both bonds will increase in value but bond A will increase by more than bond B. B. both bonds will increase in value but bond B will increase by more than bond A. C. both bonds will decrease in value but bond A will decrease by more than bond B. D. both bonds will decrease in value but bond B will decrease by more than bond A.

. All else equal, bond price volatility is greater for _________________. A. higher coupon rates B. longer maturity C. shorter maturity D. lower default risk 9. Consider the expectations theory of the term structure of interest rates. If the yield curve is upward-sloping, this indicates that investors expect short-term interest rates to ___________ in the future. A. increase B. decrease C. not change D. change in an unpredictable manner 10. A coupon bond with a coupon rate of 5% has a par value of R1000, matures in 5 years, and is selling today at R885. Determine the yield to maturity on the bond. A. 7.87% B. 9.12% C. 9.62% D. 10.30% 11. An interest rate swap usually involves: A. Swapping debt maturities. B. Swapping floating interest rate payments for fixed interest rate payments. C. Swapping interest rate tax liabilities. D. Swapping debt principal payments. 12. Swaps are used to protect against _________ risk, but they do not automatically protect the two parties from ______________ risk. A. interest rate; default B. default; interest rate C. liquidity; interest rate D. liquidity; default

13. An established value below which a traders margin may not fall is called the ______. A. daily limit B. daily margin C. maintenance margin D. convergence limit 14. A person with a short position in a commodity futures contract wants the price of the commodity to ______________. A. decrease substantially B. increase substantially C. remain unchanged D. increase or decrease substantially 15. A hypothetical futures contract on a non-dividend paying stock with a current spot price of R100 has a maturity of 4 years. If the T-bill rate is 7% per annum, what should the futures price be? A. R76.29 B. R93.46 C. R107.22 D. R131.08 16. A call option on MTN Group has an exercise price of R130. The current stock price of MTN Group is R132. The call option is ____________. A. at the money B. in the money C. out of the money D. knocked in 17. The potential loss on a Long Put is__________. A. Unlimited B. At most, the option premium C. Limited by a floor on how low the stock price can fall D. Limited by a ceiling of how high the stock price can rise

18. A corporate bond has a 10-year maturity and pays interest semi-annually. The quoted coupon rate is 6%, and the bond is currently priced at par of R1000. The bond is callable in 3 years at a call price of R1100. What is the bond's yield to call? A. 6.72% B. 9.17% C. 4.49% D. 8.98% 19. You purchase one July 120 call contract (equalling 100 shares) for a premium of R5. You hold the option until the expiration date when the stock sells for R123 per share. You will realise a ____________ on the investment. A. R200 profit B. R200 loss C. R300 profit D. R300 loss 20. You purchase one July 120 put contract (equalling 100 shares) for a premium of R3. You hold the option until the expiration date when the stock sells for R123 per share. You will realise a ___________________ on the investment. A. R300 profit B. R300 loss C. R500 loss D. R200 profit

Section B: Short Questions [6 Questions; 110 Marks] Question 1 Performance Evaluation (20 Marks) You are a financial advisor at a local investment company in Johannesburg. A client has come to you for professional advice. Based on the clients investment objectives and constraints, you have identified two possible funds: Fund A and Fund B. You have gathered the following information to assist you with advising your client: Fund A Fund B JSE All Share Index (market portfolio) Treasury Bills Average return 16% 12% 8% 5% Standard deviation 9% 8% 5% 0% Beta 1.21 1.05 1.00 0 Residual standard deviation 8% 6% 0 0 Required: 1.1. Advise your client on which fund should be selected based on the Sharpe ratio and the M2 measure. (9 marks) 1.2. Advise your client on which fund should be selected based on the Treynor ratio and the T2 measure. (9 marks) 1.3. Advise your client of your final recommendation if the selected fund is going to be a standalone fund that will not be combined with other securities

Question 2 Yield Curve (15 Marks) Steven is a fixed-income portfolio manager who works with large institutional clients. As an intern working under Steven, you are required to assist him with analysing the yield curve. You have obtained the following information regarding the current treasury yield curve: Maturity (Years) Yield to Maturity (YTM) 1 5.50% 2 6.60% 3 7.70% 4 8.80% Required: 2.1. Identify the four common shapes of the yield curve and provide a short discussion of the relationship between the YTM and maturity suggested by each curve. (8 marks) 2.2. Determine the forward rates in one years time for the one- and two-year maturing bonds. (6 marks) 2.3. Identify the shape of the yield curve based on your findings in 2.2. above. (1 mark) Question 3 Bond Duration and Convexity (20 Marks) Steven has a 4-year maturity bond with a coupon rate of 2.5% per annum and a par value of R1000. The bond has a yield to maturity of 3.6% per annum and a convexity of 125.50. Steven is expecting the interest rate to increase by 125 basis points (1.25%), and he would like to know the expected new price for his bond. Using the duration with convexity rule, estimate the predicted new price for Stevens bond.

Question 4 Swaps (20 Marks) Sasol, a global chemicals and energy company listed on the Johannesburg Stock Exchange (JSE), is considering entering into an interest rate swap agreement with Mondi, a multinational packaging and paper company. Both companies want to finance their expansion with a loan of R250 million for 6 years. Sasol wants to finance an interest-rate-sensitive asset and, therefore, wants to borrow at a floating rate. Mondi wants to finance an interest-rate-insensitive asset and, thus, wants to borrow at a fixed rate. Sasol can borrow at a fixed rate of 10% or at a floating rate of JIBAR. Mondi can borrow at a fixed rate of 12% or at a floating rate of JIBAR + 0.5%. The swap dealer charges a commission of 0.50% with bid-ask quotes of 10.50% - 11.00%. Required: 4.1. Determine whether there is a swap opportunity for the companies by calculating the quality spread differential (QSD). (5 marks) 4.2. Tabulate the net cash flow for each company and determine the net saving for each company. (11 marks) 4.3. Discuss two reasons why a company would enter into a swap agreement.

Question 5 Futures Arbitrage (15 marks) You are a financial advisor at Festo Ltd. Your client would like to explore the possibility of an arbitrage opportunity on the following futures contract. The futures contract will expire in 9 months. The underlying asset is a non-dividend paying share that is currently trading at a price of R120 per share. The risk-free interest rate per month is 0.67%. The current futures price is R125, however, the intrinsic or fair value of the futures is estimated to be R127.43. Required: 5.1. Ignoring transaction and other costs, detail the appropriate arbitrage strategy. (11 marks) 5.2. Discuss any two differences between futures and forwards contracts. (4 marks) Question 6 Options Strategies (20 Marks) 6.1. An investor purchases a put contract with an exercise price of R120 for a premium of R4. The investor simultaneously purchases the underlying share for R125. Determine the profit on this strategy if the share price at the expiration date (i) drops to R100; or (ii) increases to R140. (10 marks) 6.2. An investor writes a call option with an exercise price of R150 and a premium of R5. The investor simultaneously purchases the underlying share for R130. Determine the profit on this strategy if the share price at the expiration date (i) drops to R120; or (ii) increases to R160.