Fin maths Group Discussions

Group 1

a) Given the following table for the sport rates and the time to maturity (TTM) for Bonds in
the market.
Spot Rate Time to Maturity (TTM)
5% 1 year
6% 2 years
7% 3 years
Calculate the following:
i. The implied forward rate for 2 years at the beginning of year 2.
ii. The 1-year forward rate at the beginning of year 3.
b) With the aid of a diagram, explain why duration is a poor measure of bond price
sensitivity to interest rates when there are large changes in interest rates?

Group 2

a). You observe a €50 price for a non-dividend-paying stock. The Call option has three
years to mature, the periodically compounded risk-free interest rate is 5%, and the
exercise price is €53, u = 1.256, and d = 0.744. Assume the put option is an American-
style.
i. Determine the risk-neutral probabilities.
ii. Using the binomial option pricing model, determine the value of this call option.

Group 3

Deltaz Ltd is a company that trades on the ZSE, its correlation coefficient with ZSE is 0.8.
The standard deviation for Deltaz is 24% while that of ZSE is 16%. The 91 day Treasury
bill yield and ZSE Industrials Index expected returns are 5% and 10% respectively.
You are also given that the Return on Equity for Deltaz is 20% its current earnings are at
$2 per share and the payout ratio is 68%.

a) Determine the value of Deltaz using the Gordons growth Model

Group 4

a) Currently, the spot exchange rate is $1.50/£ and the three-month forward exchange rate is
$1.52/£. The three-month interest rate is 8.0% per annum in the U.S. and 5.8% per annum
in the U.K. Assume that you can borrow as much as $1,500,000 or £1,000,000.
i. Determine whether there is arbitrage opportunity.
ii. If arbitrage profit exist, how would you carry out covered interest arbitrage?
Show all the steps and determine the arbitrage profit.
iii. Describe how you will carry out an Uncovered Interest rate arbitrage from the
above data.

Group 5

a) An analyst has gathered the following information for the Oudin Corporation:

 Expected earnings per share = €5.70

 Expected dividends per share = €2.70
 Dividends are expected to grow at 2.75 percent per year indefinitely
 The required rate of return is 8.35 percent
i. Based on the information provided, compute the price/earnings multiple for
Oudin
ii. What is the price using the earnings multiple computed above
iii. How much will be the price if it was computed using the Constant growth
model

Group 6

You are analyzing the stock of Ansell Limited (ANN), a healthcare company, as of late June 2008. The
stock price is A$9.74. The company’s dividend per share for the fiscal year ending 30 June 2008 was
A$0.27. You expect the dividend to increase by 10 percent for the next three years and then increase by 8
percent per year forever. You estimate the required return on equity of Ansell Limited to be 12 percent.

a) Estimate the value of ANN using a two-stage dividend discount model.

b) Judge whether ANN is undervalued, fairly valued, or overvalued.
c) If the stock was expected to decline linearly from 10% to 8% over those three years
how much would be the price.

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