SFM Exam Capsule Question Part New Syllabus 1

SFM EXAM CAPSULE
NEW SYLLABUS
QUESTIONS
ALTHOUGH I HAVE ALWAYS BELIEVED THAT GAMING IS NOT POSSIBLE IN ANY EXAM,
YET STUDENTS CONTINUOUS DEMAND AND REQUEST FORCED ME TO CARRY OUT A
TIME SERIES ANALYSIS OF THE PAST PAPERS AND COME OUT WITH AN EXHAUSTIVE
LIST OF QUESTIONS WHICH ARE RELEVANT AND RELATIVELY MORE IMPORTANT FOR
NOV'19 EXAMS.
THESE ARE SELECTED QUESTIONS FROM TEXT BOOKS, PRACTICE MANUAL, PAST PAPERS,
MOCK PAPERS & RTP. THEY COVER ALMOST ALL TOPICS. IF YOU PRACTICE THESE
QUESTIONS PROPERLY, YOU WILL BE WELL PREPARED FOR THE EXAM. THESE ARE
ONLY FOR THE NEW SYLLABUS.
PLEASE REMEMBER THAT TOPICS LIKE "RISK MANAGEMENT,SECURITIZATION,

VENTURE CAPITAL, PRIVATE EQUITY, TECHNICAL ANALYSIS, FINANCIAL POLICY AND
CORPORATE STRATEGY ETC." ARE EXTREMELY IMPORTANT FOR THEORY.
SANJAY SARAF SIR

SFM NEW SYLLABUS [EXAM CAPSULE]
Future Contract
1. A wheat trader has planned to sell 440000 kgs of wheat after 6 months from now. The
spot price of wheat is ` 19 per kg and 6 months future on same is trading at ` 18.50 per kg
(Contract Size= 2000 kg). The price is expected to fall to as low as ` 17.00 per kg 6 month hence.
What trader can do to mitigate its risk of reduced profit? If he decides to make use of
future market what would be effective realized price for its sale when after 6 months is spot
price is ` 17.50 per kg and future contract price for 6 months is ` 17.55.
Portfolio Management
1. The following information is available in respect of Security X
You are required to determine the Standard Deviation of Market Return and Security Return.
2. Mr. Tamarind intends to invest in equity shares of a company the value of which depends upon
various parameters as mentioned below:
If the risk free rate of interest be 9.25%, how much is the return of the share under
Arbitrage Pricing Theory?
3. Expected returns on two stocks for particular market returns are given in the following
table:
You are required to calculate:

a. The Betas of the two stocks.
b. Expected return of each stock, if the market return is equally likely to be 7% or 25%.
c. The Security Market Line (SML), if the risk free rate is 7.5% and market return is
equally likely to be 7% or 25%.
d. The Alphas of the two stocks.
Sanjay Saraf Educational Institute Pvt. Ltd. Page 1

4. XYZ Ltd. has substantial cash flow and until the surplus funds are utilised to meet the
future capital expenditure, likely to happen after several months, are invested in a
portfolio of short-term equity investments, details for which are given below:
The current market return is 19% and the risk free rate is 11%.
Required
(i) Calculate the risk of XYZ’s short-term investment portfolio relative to that of the
market;
(ii) Whether XYZ should change the composition of its portfolio.
5. Following data is related to Company X, Market Index and Treasury Bonds for the current year
and last 4 years:
With the above data estimate the beta of Company X’s share.
6. The rates of return on the security of Company X and market portfolio for 10 periods are given
below:
(i) What is the beta of Security X?

(ii) What is the characteristic line for Security X?

7. Sunrise Limited last year paid dividend of ` 20 per share with an annual growth rate of 9%. The
risk-free rate is 11% and the market rate of return is 15%. The company has a beta factor of
1.50. However, due to the decision of the Board of Director to grow inorganically in the
recent past beta is likely to increase to 1.75.
You are required to find out under Capital Asset Pricing Model
(i) The present value of the share
(ii) The likely value of the share after the decision.
8. A company has a choice of investments between several different equity oriented mutual funds.
The company has an amount of `1 crore to invest. The details of the mutual funds are as
follows:
Required:
(i) If the company invests 20% of its investment in the first two mutual funds and an
equal amount in the mutual funds C, D and E, what is the beta of the portfolio?
(ii) If the company invests 15% of its investment in C, 15% in A, 10% in E and the
balance in equal amount in the other two mutual funds, what is the beta of the
portfolio?
(iii) If the expected return of market portfolio is 12% at a beta factor of 1.0, what will be the
portfolios expected return in both the situations given above?
9. Following data is related to Company X, Market Index and Treasury Bonds for the current year
and last 4 years:
With the above data estimate the beta of Company X’s share.

10. The rates of return on the security of Company X and market portfolio for 10 periods are given
below:
(i) What is the beta of Security X?

(ii) What is the characteristic line for Security X?
11. Mr. A has a portfolio of ` 5 crore consisting of equity shares of X Ltd. and Y Ltd. with
beta of 1.15. Other information is as follows:
Spot Value of Index Future = 21000
Multiplier = 150
You are requested to reduce beta of portfolio to 0.85 and increase beta to 1.45 by using:
a. Change in composition through Risk Free securities
b. Index futures
12. A Portfolio Manager (PM) has the following four stocks in his portfolio:
Compute the following:

(i) Portfolio beta.
(ii) If the PM seeks to reduce the beta to 0.8, how much risk free investment should he
bring in?
(iii) If the PM seeks to increase the beta to 1.2, how much risk free investment should he bring
in?

13. A has portfolio having following features:
You are required to find out the risk of the portfolio if the standard deviation of the market
index (σm) is 18%.
14. ABC Ltd. manufactures Car Air Conditioners (ACs), Window ACs and Split ACs
constituting 60%, 25% and 15% of total market value. The stand-alone Standard Deviation
and Coefficient of Correlation with market return of Car AC and Window AC is as follows:
No data for stand-alone SD and Coefficient of Correlation of Split AC is not available.

However, a company who derives its half value from Split AC and half from Window AC has a
SD of 0.50 and Coefficient of correlation with market return is 0.85. Index has a return of
10% and has SD of 0.20. Further, the risk-free rate of return is 4%.
You are required to determine:
(i) Beta of ABC Ltd.
(ii) Cost of Equity of ABC Ltd.
Assuming that ABC Ltd. wants to raise debt of an amount equal to half of its Market
Value then determine equity beta, if yield of debt is 5%.
15. Following is the data regarding six securities:
(i) Assuming three will have to be selected, state which ones will be picked.
(ii) Assuming perfect correlation, show whether it is preferable to invest 75% in A and 25% in
C or to invest 100% in E
16. The following are the data on five mutual funds:

You are required to compute Reward to Volatility Ratio and rank these portfolio using:
 Sharpe method and
 Treynor's method
assuming the risk free rate is 6%.
Swap
1. Drilldip Inc. a US based company has a won a contract in India for drilling oil filed. The project
will require an initial investment of ` 500 crore. The oil field along with equipments will
be sold to Indian Government for ` 740 crore in one year time. Since the Indian Government
will pay for the amount in Indian Rupee (`) the company is worried about exposure due
exchange rate volatility.
You are required to:
a. Construct a swap that will help the Drilldip to reduce the exchange rate risk.
b. Assuming that Indian Government offers a swap at spot rate which is 1US$ = ` 50 in one
year, then should the company should opt for this option or should it just do nothing. The
spot rate after one year is expected to be 1US$ = ` 54. Further you may also assume
that the Drilldip can also take a US$ loan at 8% p.a.
2. Derivative Bank entered into a plain vanilla swap through on OIS (Overnight Index Swap) on a
principal of ` 10 crores and agreed to receive MIBOR overnight floating rate for a fixed
payment on the principal. The swap was entered into on Monday, 2nd August, 2010 and was to
commence on 3rd August, 2010 and run for a period of 7 days.
Respective MIBOR rates for Tuesday to Monday were:
7.75%, 8.15%, 8.12%, 7.95%, 7.98%, 8.15%.
If Derivative Bank received ` 317 net on settlement, calculate Fixed rate and interest
under both legs.
Notes:
(i) Sunday is Holiday.
(ii) Work in rounded rupees and avoid decimal working.
3. A Inc. and B Inc. intend to borrow $200,000 and $200,000 in ¥ respectively for a time
horizon of one year. The prevalent interest rates are as follows:
Company ¥ Loan $ Loan
A Inc 5% 9%
B Inc 8% 10%
The prevalent exchange rate is $1 = ¥120.
They entered in a currency swap under which it is agreed that B Inc will pay A Inc @ 1% over
the ¥ Loan interest rate which the later will have to pay as a result of the agreed
currency swap whereas A Inc will reimburse interest to B Inc only to the extent of 9%.
Keeping the exchange rate invariant, quantify the opportunity gain or loss component of the
ultimate outcome, resulting from the designed currency swap.

4. NoBank offers a variety of services to both individuals as well as corporate customers.

NoBank generates funds for lending by accepting deposits from customers who are paid
interest at PLR which keeps on changing.
NoBank is also in the business of acting as intermediary for interest rate swaps. Since it is
difficult to identify matching client, NoBank acts counterparty to any party of swap.
Sleepless approaches NoBank who have already have ` 50 crore outstanding and paying
interest @PLR+80bp p.a. The duration of loan left is 4 years. Since Sleepless is expecting increase
in PLR in coming year, he asked NoBank for arrangement of interest of interest rate swap that
will give a fixed rate of interest.
As per the terms of agreement of swap NoBank will borrow `50 crore from Sleepless at
PLR+80bp per annuam and will lend ` 50 crore to Sleepless at fixed rate of 10% p.a.
The settlement shall be made at the net amount due from each other. For this services NoBank
will charge commission @0.2% p.a. if the loan amount. The present PLR is 8.2%.
You as a financial consultant of NoBank have been asked to carry out scenario analysis of this
arrangement.
Three possible scenarios of interest rates expected to remain in coming 4 years are as
follows:
Assuming that cost of capital is 10%, whether this arrangement should be accepted or
not.
Cap & Floor
1.
a. Suppose that a 1-year cap has a cap rate of 8% and a notional amount of ` 100
crore. The frequency of settlement is quarterly and the reference rate is 3-month
MIBOR. Assume that 3-month MIBOR for the next four quarters is as shown below.
You are required to compute payoff for each quarter.

b. Suppose that a 1-year floor has a floor rate of 4% and a notional amount of ` 200 crore. The
frequency of settlement is quarterly and the reference rate is 3-month MIBOR. Assume
that 3-month MIBOR for the next four quarters is as shown below.

You are required to compute payoff for each quarter.
Mergers and Acquisition
1. Simple Ltd. and Dimple Ltd. are planning to merge. The total value of the companies are
dependent on the fluctuating business conditions. The following information is given for
the total value (debt + equity) structure of each of the two companies.
The current debt of Dimple Ltd. is ` 65 lacs and of Simple Ltd. is ` 460 lacs.
Calculate the expected value of debt and equity separately for the merged entity.
2. Following information is provided relating to the acquiring company Mani Ltd. and the
target company Ratnam Ltd:
Mani Ltd. Ratnam Ltd.
Earnings after tax (` lakhs) 2,000 4,000
No. of shares outstanding (lakhs) 200 1,000
P/E ratio (No. of times) 10 5
Required:
(i) What is the swap ratio based on current market prices?
(ii) What is the EPS of Mani Ltd. after the acquisition?
(iii) What is the expected market price per share of Mani Ltd. after the acquisition,
assuming its P/E ratio is adversely affected by 10%?
(iv) Determine the market value of the merged Co.
(v) Calculate gain/loss for the shareholders of the two independent entities, due to the merger.
3. M plc and C plc operating in same industry are not experiencing any rapid growth but
providing a steady stream of earnings. M plc’s management is interested in acquisition of C plc
due to its excess plant capacity. Share of C plc is trading in market at £4 each. Other
date relating to C plc is as follows:

Balance Sheet of C plc
You are required to compute:

(i) Minimum price per share C plc should accept from M plc.
(ii) Maximum price per share M plc shall be willing to offer to C plc.
(iii) Floor Value of per share of C plc. Whether it shall play any role in decision for its
acquisition by M plc.
4. Hanky Ltd. and Shanky Ltd. operate in the same field, manufacturing newly born babies’s
clothes. Although Shanky Ltd. also has interests in communication equipments, Hanky
Ltd. is planning to take over Shanky Ltd. and the shareholders of Shanky Ltd. do not
regard it as a hostile bid.
The following information is available about the two companies.
Dividends have just been paid and the retained earnings have already been reinvested in new
projects. Hanky Ltd. plans to adopt a policy of retaining 35% of earnings after the takeover and
expects to achieve a 17% return on new investment.
Saving due to economies of scale are expected to be ` 85,00,000 per annum.
Required return to equity shareholders will fall to 20% due to portfolio effects.
Requirements
a. Calculate the existing share prices of Hanky Ltd. and Shanky Ltd.
b. Find the value of Hanky Ltd. after the takeover
c. Advise Hanky Ltd. on the maximum amount it should pay for Shanky Ltd.
5. A Ltd. (Acquirer company’s) equity capital is ` 2,00,00,000. Both A Ltd. and T Ltd.
(Target Company) have arrived at an understanding to maintain debt equity ratio at 0.30 : 1 of
the merged company. Pre-merger debt outstanding of A Ltd. stood at ` 20,00,000 and T
Ltd at ` 10,00,000 and marketable securities of both companies stood at ` 40,00,000.

You are required to determine whether liquidity of merged company shall remain
comfortable if A Ltd. acquires T Ltd. against cash payment at mutually agreed price of `
65,00,000.
6. Simpson Ltd. is considering a merger with Wilson Ltd. The data below are in the hands of both
Board of Directors. The issue at hand is how many shares of Simpson should be
exchanged for Wilson Ltd. Both boards are considering three possibilities 20,000, 25,000 and
30,000 shares. You are required to construct a table demonstrating the potential impact of
each scheme on each set of shareholders:
7. ABC Co. is considering a new sales strategy that will be valid for the next 4 years. They want to
know the value of the new strategy. Following information relating to the year which has
just ended, is available:
If it adopts the new strategy, sales will grow at the rate of 20% per year for three years. The
gross margin ratio, Assets turnover ratio, the Capital structure and the income tax rate
will remain unchanged.
Depreciation would be at 10% of net fixed assets at the beginning of the year.
The Company’s target rate of return is 15%.
Determine the incremental value due to adoption of the strategy.

8. Hanky Ltd. and Shanky Ltd. operate in the same field, manufacturing newly born babies’s
clothes. Although Shanky Ltd. also has interest in communication equipments, Hanky Ltd.
is planning to take over Shanky Ltd. and the shareholders of Shanky Ltd. do not regard
it as a hostile bid.
The following information is available about the two companies.
Dividends have just been paid and the retained earnings have already been reinvested in new
projects. Hanky Ltd. plans to adopt a policy of retaining 35% of earnings after the takeover and
expects to achieve a 17% return on new investment.
Saving due to economies of scale are expected to be ` 85,00,000 per annum.
Required return to equity shareholders will fall to 20% due to portfolio effects.
Requirements
a. Calculate the existing share prices of Hanky Ltd. and Shanky Ltd.
b. Find the value of Hanky Ltd. after the takeover
c. Advise Hanky Ltd. on the maximum amount it should pay for Shanky Ltd.
9. A Ltd.’s (Acquirer company) equity capital is ` 2,00,00,000. Both A Ltd. and T Ltd.
(Target Company) have arrived at an understanding to maintain debt equity ratio at 0.30 : 1 of
the merged company. Pre-merger debt outstanding of A Ltd. stood at ` 20,00,000 and T
Ltd at ` 10,00,000 and marketable securities of both companies stood at ` 40,00,000.
You are required to calculate total fund requirements of A Ltd. to acquire T Ltd. against cash
payment at mutually agreed price of ` 65,00,000.
10. Yes Ltd. wants to acquire No Ltd. and the cash flows of Yes Ltd. and the merged entity are
given below:
Earnings would have witnessed 5% constant growth rate without merger and 6% with
merger on account of economies of operations after 5 years in each case. The cost of
capital is 15%.
The number of shares outstanding in both the companies before the merger is the same and the
companies agree to an exchange ratio of 0.5 shares of Yes Ltd. for each share of No Ltd.
PV factor at 15% for years 1-5 are 0.870, 0.756; 0.658, 0.572, 0.497 respectively.


(i) Compute the Value of Yes Ltd. before and after merger
(ii) Value of Acquisition and
(iii) Gain to shareholders of Yes Ltd.
11. The following is the Balance-sheet of Grape Fruit Company Ltd as at March 31st, 2011.
The Company did not perform well and has suffered sizable losses during the last few
years. However, it is felt that the company could be nursed back to health by proper
financial restructuring. Consequently the following scheme of reconstruction has been
drawn up:
(i) Equity shares are to be reduced to ` 25/- per share, fully paid up;
(ii) Preference shares are to be reduced (with coupon rate of 10%) to equal number of shares
of ` 50 each, fully paid up.
(iii) Debenture holders have agreed to forgo the accrued interest due to them. In the
future, the rate of interest on debentures is to be reduced to 9 percent.
(iv) Trade creditors will forego 25 percent of the amount due to them.
(v) The company issues 6 lakh of equity shares at ` 25 each and the entire sum was to be
paid on application. The entire amount was fully subscribed by promoters.
(vi) Land and Building was to be revalued at ` 450 lakhs, Plant and Machinery was to be
written down by ` 120 lakhs and a provision of `15 lakhs had to be made for bad and
doubtful debts.
Required:
(i) Show the impact of financial restructuring on the company’s activities.
(ii) Prepare the fresh balance sheet after the reconstructions is completed on the basis of the
above proposals.

12. XY Ltd. has two major operating divisions, furniture manufacturing and real estate, with
revenues of ` 2600 crore and ` 6200 crore respectively. Following financial information is
available.
Balance Sheet as on 31-3-2015
Summarised cash flow data for XY Ltd. is as follows:
The company's current share price is ` 118.40, and each debenture is trading in market at ` 131.
Projected financial data (in ` Crore) in real terms (excluding depreciation) of the two
divisions is as follows:
* Allocated HO Overheads reflect actual cash flows.

Other Information:
 Applicable Corporate tax rate is of 30%, payable in the year, the relevant cash flow arises.
 Inflation is expected to remain at approximately 3% per year.
 The risk free rate is 5.5% and the market return 14%.
 XY Ltd.’s equity beta is 1.15.

 The average equity betas in the Furniture Manufacturing and Realty Sectors are 1.3 and 0.9
respectively and the gearing levels in Furniture Manufacturing and Realty sectors by
market values are 70% equity 30% debt and 80% equity 20% debt respectively.
 The current cost of the debentures and long term loan are almost identical.
 The debentures are redeemable at par in 15 years' time.
The company is considering a demerger whereby the two divisions shall be floated
separately on the stock market.
Terms of Demerger
(1) The debentures would be serviced by the real estate division and the long term loans
by the furniture manufacturing division.
(2) The existing equity would be split evenly between the divisions, although new
ordinary shares would be issued to replace existing shares.
(3) If a demerger occurs allocated overhead would rise to ` 60 crore per year for each company.
(4) Demerger would involve single one time after tax cost of ` 160 crore in the first year which
would be shared equally by the two companies. There would be no other significant
impact on expected cash flows.
Required
Using real cash flows and time horizon of 15 year time and infinite period, evaluates
whether or not it is expected to be financially advantageous to the original shareholders of XY
Ltd. for the company to separately float the two divisions on the stock market.
Note: In any gearing estimates the Furniture Manufacturing division may be assumed to
comprise 55% of the market value of equity of XY Ltd, and Real Estate division 45%.
13. Two companies Bull Ltd. and Bear Ltd. recently have been merged. The merger initiative has
been taken by Bull Ltd. to achieve a lower risk profile for the combined firm in spite of fact that
both companies belong to different industries and disclose a little co- movement in their
profit earning streams. Though there is likely to synergy benefits to the tune of ` 7 crore from
proposed merger. Further both companies are equity financed and other details are as follows:
Expected Market Return and Risk Free Rate of Return are 13% and 8% respectively.
Shares of merged entity have been distributed in the ratio of 2:1 i.e. market capitalization just
before merger. You are required to:
a. Calculate return on shares of both companies before merger and after merger.
b. Calculate the impact of merger on Mr. X, a shareholder holding 4% shares in Bull Ltd.
and 2% share of Bear Ltd.

14. XYZ, a large business house is planning to acquire ABC another business entity in
similar line of business. XYZ has expressed its interest in making a bid for ABC. XYZ
expects that after acquisition the annual earning of ABC will increase by 10%.
Following information, ignoring any potential synergistic benefits arising out of possible
acquisitions, are available:
Assume Beta of debt to be zero and corporate tax rate as 30%, determine the Beta of
combined entity.
15. Teer Ltd. is considering acquisition of Nishana Ltd. CFO of Teer Ltd. is of opinion that
Nishana Ltd. will be able to generate operating cash flows (after deducting necessary
capital expenditure) of ` 10 crore per annum for 5 years.
The following additional information was not considered in the above estimations.
(i) Office premises of Nishana Ltd. can be disposed of and its staff can be relocated in Teer
Ltd.’s office not impacting the operating cash flows of either businesses. However,
this action will generate an immediate capital gain of ` 20 crore.
(ii) Synergy Gain of ` 2 crore per annum is expected to be accrued from the proposed
acquisition.
(iii) Nishana Ltd. has outstanding Debentures having a market value of ` 15 crore. It has
no other debts.
(iv) It is also estimated that after 5 years if necessary, Nishana Ltd. can also be disposed
of for an amount equal to five times its operating annual cash flow.
Calculate the maximum price to be paid for Nishana Ltd. if cost of capital of Teer Ltd. is 20%.
Ignore any type of taxation.
16. AB Ltd., is planning to acquire and absorb the running business of XY Ltd. The valuation is to
be based on the recommendation of merchant bankers and the consideration is to be discharged
in the form of equity shares to be issued by AB Ltd. As on 31.3.2006, the paid up capital of AB
Ltd. consists of 80 lakhs shares of `10 each. The highest and the lowest market quotation during
the last 6 months were `570 and `430. For the purpose of the exchange, the price per share is to
be reckoned as the average of the highest and lowest market price during the last 6 months
ended on 31.3.06.

XY Ltd.’s Balance Sheet as at 31.3.2006 is summarised below:
An independent firm of merchant bankers engaged for the negotiation, have produced
the following estimates of cash flows from the business of XY Ltd.:
It is the recommendation of the merchant banker that the business of XY Ltd. may be
valued on the basis of the average of (i) Aggregate of discounted cash flows at 8% and (ii) Net
assets value. Present value factors at 8% for years
1-5: 0.93 0.86 0.79 0.74 0.68
(i) Calculate the total value of the business of XY Ltd.
(ii) The number of shares to be issued by AB Ltd.; and
(iii) The basis of allocation of the shares among the shareholders of XY Ltd.
Security Valuation
1. The following data is related to 8.5% Fully Convertible (into Equity shares) Debentures
issued by JAC Ltd. at ` 1000.


a. Conversion Value of Debenture
b. Market Conversion Price
c. Conversion Premium per share
d. Ratio of Conversion Premium
e. Premium over Straight Value of Debenture
f. Favourable income differential per share
g. Premium pay back period
2. Pragya Limited has issued 75,000 equity shares of ` 10 each. The current market price per share
is ` 24. The company has a plan to make a rights issue of one new equity share at a
price of ` 16 for every four share held.
(i) Calculate the theoretical post-rights price per share;
(ii) Calculate the theoretical value of the right alone;
(iii) Show the effect of the rights issue on the wealth of a shareholder, who has 1,000
shares assuming he sells the entire rights; and
(iv) Show the effect, if the same shareholder does not take any action and ignores the issue.
3. ABC Limited’s shares are currently selling at ` 13 per share. There are 10,00,000 shares
outstanding. The firm is planning to raise ` 20 lakhs to Finance a new project.
Required:
What are the ex-right price of shares and the value of a right, if
(i) The firm offers one right share for every two shares held.
(ii) The firm offers one right share for every four shares held.
(iii) How does the shareholders’ wealth change from (i) to (ii)? How does right issue
increases shareholders’ wealth?
4. ABC Ltd. has ` 300 million, 12 per cent bonds outstanding with six years remaining to
maturity. Since interest rates are falling, ABC Ltd. is contemplating of refunding these
bonds with a ` 300 million issue of 6 year bonds carrying a coupon rate of 10 per cent. Issue cost
of the new bond will be ` 6 million and the call premium is 4 per cent. ` 9 million
being the unamortized portion of issue cost of old bonds can be written off no sooner
the old bonds are called off. Marginal tax rate of ABC Ltd. is 30 per cent. You are required to
analyse the bond refunding decision.
5. Suppose Mr. A is offered a 10% Convertible Bond (par value ` 1,000) which either can be
redeemed after 4 years at a premium of 5% or get converted into 25 equity shares
currently trading at ` 33.50 and expected to grow by 5% each year. You are required to
determine the minimum price Mr. A shall be ready to pay for bond if his expected rate of return
is 11%.


(i) Conversion Value of Debenture
(ii) Market Conversion Price
(iii) Conversion Premium per share
(iv) Ratio of Conversion Premium
(v) Premium over Straight Value of Debenture
(vi) Favourable income differential per share
(vii) Premium pay back period
7. Calculate the value of share from the following information:

Profit of the company ` 290 crores
Equity capital of company ` 1,300 crores
Par value of share ` 40 each
Debt ratio of company 27
Long run growth rate of the company 8%
Beta 0.1; risk free interest rate 8.7%
Market returns 10.3%
Capital expenditure per share ` 47
Depreciation per share ` 39
Change in Working capital ` 3.45 per share
8. The following is the Yield structure of AAA rated debenture:

Period Yield (%)
3 months 8.5%
6 months 9.25
1 year 10.50
2 years 11.25
3 years and above 12.00
(i) Based on the expectation theory calculate the implicit one-year forward rates in year 2 and
year 3.
(ii) If the interest rate increases by 50 basis points, what will be the percentage change in the
price of the bond having a maturity of 5 years? Assume that the bond is fairly priced at the
moment at ` 1,000.

9. M/s Transindia Ltd. is contemplating calling ` 3 crores of 30 years, ` 1,000 bond issued 5 years
ago with a coupon interest rate of 14 per cent. The bonds have a call price of ` 1,140 and had
initially collected proceeds of ` 2.91 crores due to a discount of ` 30 per bond. The initial floating
cost was ` 3,60,000. The Company intends to sell ` 3 crores of 12 per cent coupon rate, 25
years bonds to raise funds for retiring the old bonds. It proposes to sell the new bonds
at their par value of ` 1,000. The estimated floatation cost is ` 4,00,000. The company is
paying 40% tax and its after tax cost of debt is 8 per cent. As the new bonds must first be
sold and their proceeds, then used to retire old bonds, the company expects a two
months period of overlapping interest during which interest must be paid on both the old
and new bonds. What is the feasibility of refunding bonds?
Mutual Funds
1. Mr. A can earn a return of 16 per cent by investing in equity shares on his own. Now he is
considering a recently announced equity based mutual fund scheme in which initial
expenses are 5.5 per cent and annual recurring expenses are 1.5 per cent. How much
should the mutual fund earn to provide Mr. A return of 16 per cent?
2. A Mutual Fund having 300 units has shown its NAV of ` 8.75 and ` 9.45 at the beginning and at
the end of the year respectively. The Mutual Fund has given two options:
(i) Pay ` 0.75 per unit as dividend and ` 0.60 per unit as a capital gain, or
(ii) These distributions are to be reinvested at an average NAV of ` 8.65 per unit.
What difference it would make in terms of return available and which option is
preferable?
3. Orange purchased 200 units of Oxygen Mutual Fund at ` 45 per unit on 31st December, 2009. In
2010, he received ` 1.00 as dividend per unit and a capital gains distribution of ` 2 per unit.
Required:
(i) Calculate the return for the period of one year assuming that the NAV as on 31st
December 2010 was ` 48 per unit.
(ii) Calculate the return for the period of one year assuming that the NAV as on 31st
December 2010 was ` 48 per unit and all dividends and capital gains distributions
have been reinvested at an average price of ` 46.00 per unit.
Ignore taxation.
4. A mutual fund made an issue of 10,00,000 units of ` 10 each on January 01, 2008. No entry load
was charged. It made the following investments:

During the year, dividends of ` 12,00,000 were received on equity shares. Interest on all types of
debt securities was received as and when due. At the end of the year equity shares and
10% debentures are quoted at 175% and 90% respectively. Other investments are at par.
Find out the Net Asset Value (NAV) per unit given that operating expenses paid during the
year amounted to ` 5,00,000. Also find out the NAV, if the Mutual fund had distributed
a dividend of ` 0.80 per unit during the year to the unit holders.
5. A Mutual Fund Co. has the following assets under it on the close of business as on:
Total No. of Units 6,00,000

(i) Calculate Net Assets Value (NAV) of the Fund.
(ii) Following information is given:
Assuming one Mr. A, submits a cheque of ` 30,00,000 to the Mutual Fund and the Fund
manager of this company purchases 8,000 shares of M Ltd; and the balance amount is held in
Bank. In such a case, what would be the position of the Fund?
(iii) Find new NAV of the Fund as on 2nd February 2012.
6. On 1-4-2012 ABC Mutual Fund issued 20 lakh units at ` 10 per unit. Relevant initial
expenses involved were ` 12 lakhs. It invested the fund so raised in capital market
instruments to build a portfolio of ` 185 lakhs. During the month of April, 2012 it disposed off
some of the instruments costing ` 60 lakhs for ` 63 lakhs and used the proceeds in
purchasing securities for ` 56 lakhs. Fund management expenses for the month of April, 2012
was ` 8 lakhs of which 10% was in arrears. In April, 2012 the fund earned dividends amounting
to ` 2 lakhs and it distributed 80% of the realized earnings. On 30-4-2012 the market value of the
portfolio was ` 198 lakhs.
Mr. Akash, an investor, subscribed to 100 units on 1-4-2012 and disposed off the same at
closing NAV on 30-4-2012. What was his annual rate of earning?

7. Based on the following data, estimate the Net Asset Value (NAV) on per unit basis of a Regular
Income Scheme of a Mutual Fund on 31-3-2015:
Current realizable value of fixed income securities of face value of ` 100 is ` 96.50.
Number of Units (` 10 face value each): 275000
All the listed equity shares were purchased at a time when market portfolio index was
12,500. On NAV date, the market portfolio index is at 19,975.
There has been a diminution of 15% in unlisted bonds and debentures valuation.
Listed bonds and debentures carry a market value of ` 7.5 lakhs, on NAV date.
Operating expenses paid during the year amounted to ` 2.24 lakhs.
8. Based on the following data, estimate the Net Asset Value (NAV) 1st July 2016 on per
unit basis of a Debt Fund:
Number of Units (` 10 face value each): 100000

All securities were purchased at a time when applicable Yield to Maturity (YTM) was
10%. On NAV date, the required yield increased by 75 basis point and Cash in hand and
accrued expenses were ` 6,72,800 and ` 2,37,400 respectively.

Indian Capital Market
1. The current market price of an equity share of Penchant Ltd is ` 420. Within a period of 3
months, the maximum and minimum price of it is expected to be ` 500 and ` 400
respectively. If the risk free rate of interest be 8% p.a., what should be the value of a 3 months
Call option under the “Risk Neutral” method at the strike rate of ` 450 ? Given e0.02 =
1.0202
2. Sensex futures are traded at a multiple of 50. Consider the following quotations of
Sensex futures in the 10 trading days during February, 2009:
Abshishek bought one sensex futures contract on February, 04. The average daily
absolute change in the value of contract is ` 10,000 and standard deviation of these
changes is ` 2,000. The maintenance margin is 75% of initial margin.
You are required to determine the daily balances in the margin account and payment on margin
calls, if any.
3. BSE 5000
Value of portfolio ` 10,10,000
Risk free interest rate 9% p.a.
Dividend yield on Index 6% p.a.
Beta of portfolio 1.5
We assume that a future contract on the BSE index with four months maturity is used to hedge
the value of portfolio over next three months. One future contract is for delivery of 50 times the
index.
Based on the above information calculate:
(i) Price of future contract.
(ii) The gain on short futures position if index turns out to be 4,500 in three months.

4. Derivative Bank entered into a plain vanilla swap through on OIS (Overnight Index Swap) on a
principal of ` 10 crores and agreed to receive MIBOR overnight floating rate for a fixed payment
on the principal. The swap was entered into on Monday, 2nd August, 2010 and was to
commence on 3rd August, 2010 and run for a period of 7 days.
7.75%,8.15%,8.12%,7.95%,7.98%,8.15%.
If Derivative Bank received ` 317 net on settlement, calculate Fixed rate and interest
under both legs.
Notes:
(i) Sunday is Holiday.
(ii) Work in rounded rupees and avoid decimal working.
5. The following market data is available:

Spot USD/JPY 116.00
Forward Rate Agreement (FRA) for Yen is Nil.

1. What should be 3 months FRA rate at 3 months forward?
2. The 6 & 12 months LIBORS are 5% & 6.5% respectively. A bank is quoting 6/12
USD FRA at 6.50 – 6.75%. Is any arbitrage opportunity available?
Calculate profit in such case.
6. Given below is the Balance Sheet of S Ltd. as on 31.3.2008:
You are required to work out the value of the Company's, shares on the basis of Net
Assets method and Profit-earning capacity (capitalization) method and arrive at the fair
price of the shares, by considering the following information:
(i) Profit for the current year ` 64 lakhs includes ` 4 lakhs extraordinary income and ` 1
lakh income from investments of surplus funds; such surplus funds are unlikely to recur.
(ii) In subsequent years, additional advertisement expenses of ` 5 lakhs are expected to be
incurred each year.
(iii) Market value of Land and Building and Plant and Machinery have been ascertained at ` 96
lakhs and ` 100 lakhs respectively. This will entail additional depreciation of ` 6 lakhs each
year.

(iv) Effective Income-tax rate is 30%.

(v) The capitalization rate applicable to similar businesses is 15%.
7. A company is long on 10 MT of copper @ ` 474 per kg (spot) and intends to remain so for the
ensuing quarter. The standard deviation of changes of its spot and future prices are 4% and 6%
respectively, having correlation coefficient of 0.75.
What is its hedge ratio? What is the amount of the copper future it should short to
achieve a perfect hedge?
8. Miss K holds 10,000 shares of IBS Bank @ 2,738.70 when 1 month Index Future was
trading @ 6,086 The share has a Beta (β) of 1.2. How many Index Futures should she
short to perfectly hedge his position. A single Index Future is a lot of 50 indices.
Justify your result in the following cases:
(i) when the Index zooms by 1%
(ii) when the Index plummets by 2%
9. Abhishek Ltd. has a surplus cash of `90 lakhs and wants to distribute 30% of it to the
shareholders. The Company decides to buyback shares. The Finance Manager of the
Company estimates that its share price after re-purchase is likely to be 10% above the
buyback price; if the buyback route is taken. The number of shares outstanding at
present is 10 lakhs and the current EPS is `3.
a. The price at which the shares can be repurchased, if the market capitalization of the
company should be ` 200 lakhs after buyback.
b. The number of shares that can be re-purchased.
c. The impact of share re-purchase on the EPS, assuming the net income is same.
10. A Mutual Fund is holding the following assets in ` Crores :

Investments in diversified equity shares 90.00
Cash and Bank Balances 10.00
100.00
The Beta of the portfolio is 1.1. The index future is selling at 4300 level. The Fund
Manager apprehends that the index will fall at the most by 10%. How many index futures he
should short for perfect hedging so that the portfolio beta is reduced to 1.00? One index
future consists of 50 units.
Substantiate your answer assuming the Fund Manager's apprehension will materialize.
11. On 31-8-2011, the value of stock index was ` 2,200. The risk free rate of return has been 8% per
annum. The dividend yield on this Stock Index is as under:
Month Dividend Paid (p.a.)
January 3%
February 4%
March 3%
April 3%

May 4%
June 3%
July 3%
August 4%
September 3%
October 3%
November 4%
December 3%
Assuming that interest is continuously compounded daily, find out the future price of
contract deliverable on 31-12-2011. Given: e0.01583 = 1.01593
12. From the following data for Government securities, calculate the forward rates:
index.
13. XYZ Limited borrows £ 15 Million of six months LIBOR + 10.00% for a period of 24
months. The company anticipates a rise in LIBOR, hence it proposes to buy a Cap
Option from its Bankers at the strike rate of 8.00%. The lump sum premium is 1.00% for
the entire reset periods and the fixed rate of interest is 7.00% per annum. The actual
position of LIBOR during the forthcoming reset period is as under:
Reset Period LIBOR
1 9.00%
2 9.50%
3 10.00%
You are required to show how far interest rate risk is hedged through Cap Option.
For calculation, work out figures at each stage up to four decimal points and amount
nearest to £. It should be part of working notes.
14. Suppose a dealer quotes ‘All-in-cost’ for a generic swap at 8% against six month LIBOR flat. If
the notional principal amount of swap is ` 5,00,000.
(i) Calculate semi-annual fixed payment.
(ii) Find the first floating rate payment for (i) above if the six month period from the
effective date of swap to the settlement date comprises 181 days and that the
corresponding LIBOR was 6% on the effective date of swap.

In (ii) above, if the settlement is on ‘Net’ basis, how much the fixed rate payer would pay to the
floating rate payer?
Generic swap is based on 30/360 days basis.
15. A trader is having in its portfolio shares worth ` 85 lakhs at current price and cash ` 15 lakhs.
The beta of share portfolio is 1.6. After 3 months the price of shares dropped by 3.2%.
Determine:
(i) Current portfolio beta
(ii) Portfolio beta after 3 months if the trader on current date goes for long position on ` 100
lakhs Nifty futures.
16. The share of X Ltd. is currently selling for ` 300. Risk free interest rate is 0.8% per
month. A three months futures contract is selling for ` 312. Develop an arbitrage strategy and
show what your riskless profit will be 3 month hence assuming that X Ltd. will not pay
any dividend in the next three months.
17. Sumana wanted to buy shares of ElL which has a range of ` 411 to ` 592 a month later. The
present price per share is ` 421. Her broker informs her that the price of this share can sore up to
` 522 within a month or so, so that she should buy a one month CALL of ElL. In order to be
prudent in buying the call, the share price should be more than or at least ` 522 the assurance of
which could not be given by her broker.
Though she understands the uncertainty of the market, she wants to know the probability of
attaining the share price ` 592 so that buying of a one month CALL of EIL at the
execution price of ` 522 is justified. Advice her. Take the risk free interest to be 3.60% and e0.036
= 1.037.
Foreign Exchange Risk Management
1. You as a dealer in foreign exchange have the following position in Swiss Francs on 31st October,
2009:
What steps would you take, if you are required to maintain a credit Balance of Swiss
Francs 30,000 in the Nostro A/c and keep as overbought position on Swiss Francs
10,000?

2.
(i) The rate of inflation in USA is likely to be 3% per annum and in India it is likely to be 6.5%.
The current spot rate of US $ in India is ` 43.40. Find the expected rate of US $ in India
after one year and 3 years from now using purchasing power parity theory.
(ii) On April 1, 3 months interest rate in the UK £ and US $ are 7.5% and 3.5% per annum
respectively. The UK £/US $ spot rate is 0.7570. What would be the forward rate for US $
for delivery on 30th June?
3. XYZ Ltd. is an export oriented business house based in Mumbai. The Company invoices in
customers’ currency. Its receipt of US $ 1,00,000 is due on September 1, 2009.
Market information as at June 1, 2009 is:
Exchange Rates Currency Futures
US $/` US $/` Contract size ` 4,72,000
Spot 0.02140 June 0.02126
1 Month Forward 0.02136 September 0.02118
3 Months Forward 0.02127
Initial Margin Interest Rates in India
June ` 10,000 7.50%
September ` 15,000 8.00%
On September 1, 2009 the spot rate US $/` is 0.02133 and currency future rate is
0.02134. Comment which of the following methods would be most advantageous for XYZ Ltd.
a. Using forward contract
b. Using currency futures
c. Not hedging currency risks.
It may be assumed that variation in margin would be settled on the maturity of the futures
contract.
4. Following information relates to AKC Ltd. which manufactures some parts of an

electronics device which are exported to USA, Japan and Europe on 90 days credit terms.
Cost and Sales information:
Foreign exchange rate information:
Advice AKC Ltd. by calculating average contribution to sales ratio whether it should
hedge it’s foreign currency risk or not.

5. Sun Ltd. is planning to import equipment from Japan at a cost of 3,400 lakh yen. The
company may avail loans at 18 percent per annum with which it can import the
equipment. The company has also an offer from Osaka branch of an India based bank
extending credit of 180 days at 2 percent per annum against opening of an irrecoverable letter of
credit.
Additional information:
Present exchange rate `100 = 340 yen
180 day’s forward rate `100 = 345 yen
Commission charges for letter of credit at 2 per cent per 12 months.
Advice the company whether the offer from the foreign branch should be accepted.
6. An exporter requests his bank to extend the forward contract for US$ 20,000 which is
due for maturity on 31st October, 2014, for a further period of 3 months. He agrees to pay the
required margin money for such extension of the contract.
Contracted Rate – US$ 1= ` 62.32
The US Dollar quoted on 31-10-2014:-
Spot – 61.5000/61.5200
3 months’ Discount -0.93% /0.87%
Margin money from bank’s point of view for buying and selling rate is 0.45% and 0.20%
respectively.
Compute:
(i) The cost to the importer in respect of the extension of the forward contract, and
(ii) The rate of new forward contract.
7. Columbus Surgicals Inc. is based in US, has recently imported surgical raw materials
from the UK and has been invoiced for £ 480,000, payable in 3 months. It has also
exported surgical goods to India and France.
The Indian customer has been invoiced for £ 138,000, payable in 3 months, and the
French customer has been invoiced for € 590,000, payable in 4 months.
Current spot and forward rates are as follows:
£ / US$
Spot: 0.9830 - 0.9830
Three months forward: 0.9520 – 0.9545
US$ / €
Spot: 1.8890 – 1.8920
Four months forward: 1.9510 – 1.9540
Current money market rates are as follows:
UK: 10.0% - 12.0% p.a.
France: 14.0% – 16.0% p.a.
USA: 11.5% - 13.0% p.a.
You as Treasury Manager are required to show how the company can hedge its foreign
exchange exposure using Forward markets and Money markets hedge and suggest which
the best hedging technique is.

8. Following are the rates quoted at Mumbai for British Pound (£):
Verify whether there is any scope for covered interest arbitrage, if you can borrow in
rupees.
9. Bharat Silk Limited, an established exporter of silk materials, has a surplus of US$ 20
million as on 31st May 2015. The banker of the company informs the following exchange rates
that are quoted at three different forex markets:
GBP/ INR 99.10 at London
INR/ GBP 0.01 at London
USD/ INR 64.10 at Mumbai
INR/ US$ 0.02 at Mumbai
USD/ GBP 0.65 at New York
GBP/ USD 1.5530 at New York
Assuming that there are no transaction costs, advice the company how to avail the
arbitrage gain from the above quoted spot exchange rates.
10. On January 28, 2010 an importer customer requested a bank to remit Singapore Dollar (SGD)
25,00,000 under an irrevocable LC. However, due to bank strikes, the bank could effect the
remittance only on February 4, 2010. The interbank market rates were as follows:
January, 28 February 4
Bombay US$1 = ` 45.85/45.90 45.91/45.97
London Pound 1 = US$ 1.7840/1.7850 1.7765/1.7775
Pound 1 = SGD 3.1575/3.1590 3.1380/3.1390
The bank wishes to retain an exchange margin of 0.125%. How much does the customer stand to
gain or lose due to the delay? (Calculate rate in multiples of .0001)
11. Your forex dealer had entered into a cross currency deal and had sold US $ 10,00,000 against
EURO at US $ 1 = EURO 1.4400 for spot delivery.
However, later during the day, the market became volatile and the dealer in compliance with
his management’s guidelines had to square – up the position when the quotations were:
Spot US $1 INR 61.4300/4500
Spot US $1 EURO 1.4250/4350
What will be the gain or loss in the transaction?
12. Followings are the spot exchange rates quoted at three different forex markets:
USD/INR 59.25/ 59.35 in Mumbai
GBP/INR 102.50/ 103.00 in London
GBP/USD 1.70/ 1.72 in New York

The arbitrageur has USD1,00,00,000. Assuming that bank wishes to retain an exchange margin
of 0.125%, explain whether there is any arbitrage gain possible from the quoted spot exchange
rates.
13. Nitrogen Ltd, a UK company is in the process of negotiating an order amounting to €4

million with a large German retailer on 6 months credit. If successful, this will be the first time
that Nitrogen Ltd has exported goods into the highly competitive German market. The
following three alternatives are being considered for managing the transaction risk before
the order is finalized.
(i) Invoice the German firm in Sterling using the current exchange rate to calculate the invoice
amount.
(ii) Alternative of invoicing the German firm in € and using a forward foreign exchange
contract to hedge the transaction risk.
(iii) Invoice the German first in € and use sufficient 6 months sterling future contracts (to the
nearly whole number) to hedge the transaction risk.
Following data is available:
Spot Rate € 1.1750 - €1.1770/£
6 months forward premium 0.60-0.55 Euro cents
6 months further contract is currently trading at €1.1760/£
6 months future contract size is £62500
Spot rate and 6 months future rate €1.1785/£
Required:
(a) Calculate to the nearest £ the receipt for Nitrogen Ltd, under each of the three
proposals.
(b) In your opinion, which alternative would you consider to be the most appropriate
and the reason thereof.
14. AMK Ltd. an Indian based company has subsidiaries in U.S. and U.K.
Forecasts of surplus funds for the next 30 days from two subsidiaries are as below:
U.S. $12.5 million
U.K. £ 6 million
Following exchange rate information is obtained:
$/` £/`
Spot 0.0215 0.0149
30 days forward 0.0217 0.0150
Annual borrowing/deposit rates (Simple) are available.
` 6.4%/6.2%
$ 1.6%/1.5%
£ 3.9%/3.7%
The Indian operation is forecasting a cash deficit of `500 million.
It is assumed that interest rates are based on a year of 360 days.
(i) Calculate the cash balance at the end of 30 days period in ` for each company
under each of the following scenarios ignoring transaction costs and taxes:

a. Each company invests/finances its own cash balances/deficits in local currency

independently.
b. Cash balances are pooled immediately in India and the net balances are
invested/borrowed for the 30 days period.
(ii) Which method do you think is preferable from the parent company’s point of view?
15. A Ltd. of U.K. has imported some chemical worth of USD 3,64,897 from one of the U.S.
suppliers. The amount is payable in six months’ time. The relevant spot and forward rates are:
Spot rate USD 1.5617-1.5673
6 months’ forward rate USD 1.5455 –1.5609
The borrowing rates in U.K. and U.S. are 7% and 6% respectively and the deposit rates are 5.5%
and 4.5% respectively.
Currency options are available under which one option contract is for US$ 21250. The
option premium for US$ at a strike price of GBP 0.58825/USD is GBP 0.036 (call option) and
GBP 0.056 (put option) for 6 months period.
The company has 3 choices:
(i) Forward cover
(ii) Money market cover, and
(iii) Currency option
Which of the alternatives is preferable by the company?
16. India Imports co., purchased USD 100,000 worth of machines from a firm in New York, USA.
The value of the rupee in terms of the Dollar has been decreasing. The firm in New York offers
2/10, net 90 terms. The spot rate for the USD is ` 55; the 90 days forward rate is ` 56.
(i) Compute the Rupee cost of paying the account within the 10 days.
(ii) Compute the Rupee cost of buying a forward contract to liquidate the account in 10 days.
(iii) The difference between part a and part b is the result of the time value of money
(the discount for prepayment) and protection from currency value fluctuation.
Determine the magnitude of each of these components.
17. Your bank’s London office has surplus funds to the extent of USD 5,00,000/- for a period of 3
months. The cost of the funds to the bank is 4% p.a. It proposes to invest these funds in
London, New York or Frankfurt and obtain the best yield, without any exchange risk to the
bank. The following rates of interest are available at the three centres for investment of
domestic funds there at for a period of 3 months.
London 5 % p.a.
New York 8% p.a.
Frankfurt 3% p.a.
The market rates in London for US dollars and Euro are as under:
London on New York
Spot 1.5350/90
1 month 15/18
2 month 30/35
3 months 80/85

London on Frankfurt
Spot 1.8260/90
1 month 60/55
2 month 95/90
3 month 145/140
At which centre, will be investment be made & what will be the net gain (to the nearest pound)
to the bank on the invested funds?
Management Buy-out
1. Personal Computer Division of Distress Ltd., a computer hardware manufacturing

company has started facing financial difficulties for the last 2 to 3 years. The
management of the division headed by Mr. Smith is interested in a buyout on 1 April
2013. However, to make this buy-out successful there is an urgent need to attract
substantial funds from venture capitalists.
Ven Cap, a European venture capitalist firm has shown its interest to finance the
proposed buy-out. Distress Ltd. is interested to sell the division for ` 180 crore and Mr. Smith is
of opinion that an additional amount of ` 85 crore shall be required to make this division viable.
The expected financing pattern shall be as follows:
The warrants can be exercised any time after 4 years from now for 10 equity shares @ ` 120 per
share.
The loan is repayable in one go at the end of 8th year. The debentures are repayable in equal
annual installment consisting of both principal and interest amount over a period of 6 years.
Mr. Smith is of view that the proposed dividend shall not be kept more than 12.5% of
distributable profit for the first 4 years. The forecasted EBIT after the proposed buyout is as
follows:

Applicable tax rate is 35% and it is expected that it shall remain unchanged at least for 5-6
years. In order to attract VenCap, Mr. Smith stated that book value of equity shall
increase by 20% during above 4 years. Although, VenCap has shown their interest in
investment but are doubtful about the projections of growth in the value as per
projections of Mr. Smith. Further VenCap also demanded that warrants should be
convertible in 18 shares instead of 10 as proposed by Mr. Smith.
You are required to determine whether or not the book value of equity is expected to
grow by 20% per year. Further if you have been appointed by Mr. Smith as advisor then
whether you would suggest to accept the demand of VenCap of 18 shares instead of 10 or not.
Bond Valuation
1. Mr. A is planning for making investment in bonds of one of the two companies X Ltd. and Y
Ltd. The detail of these bonds is as follows:
The current market price of X Ltd.’s bond is ` 10,796.80 and both bonds have same Yield To
Maturity (YTM). Since Mr. A considers duration of bonds as the basis of decision making, you
are required to calculate the duration of each bond and you decision.

Interest Rate Collars
1. XYZ Inc. issues a £ 10 million floating rate loan on July 1, 2013 with resetting of coupon rate
every 6 months equal to LIBOR + 50 bp. XYZ is interested in a collar strategy by selling
a Floor and buying a Cap. XYZ buys the 3 years Cap and sell 3 years Floor as per the following
details on July 1, 2013:
Notional Principal Amount $ 10 million
Reference Rate 6 months LIBOR
Strike Rate 4% for Floor and 7% for Cap
Premium 0*
*Since Premium paid for Cap = Premium received for Floor
Using the following data you are required to determine:
(i) Effective interest paid out at each reset date,
(ii) The average overall effective rate of interest p.a.
Forward Rate Agreement
1. Electraspace is consumer electronics wholesaler. The business of the firm is highly

seasonal in nature. In 6 months of a year, firm has a huge cash deposits and especially near
Christmas time and other 6 months firm cash crunch, leading to borrowing of money to cover
up its exposures for running the business.
It is expected that firm shall borrow a sum of €50 million for the entire period of slack
season in about 3 months.
A Bank has given the following quotations:

Spot 5.50% - 5.75%
3 × 6 FRA 5.59% - 5.82%
3 × 9 FRA 5.64% - 5.94%
3 month €50,000 future contract maturing in a period of 3 months is quoted at 94.15 (5.85%).
a. How a FRA, shall be useful if the actual interest rate after 6 months turnout to be:
(i) 4.5% (ii) 6.5%
b. How 3 moths Future contract shall be useful for company if interest rate turns out
as mentioned in part (a) above.

Valuation of Company
1. A valuation done of an established company by a well-known analyst has estimated a

value of ` 500 lakhs, based on the expected free cash flow for next year of ` 20 lakhs and an
expected growth rate of 5%.
While going through the valuation procedure, you found that the analyst has made the
mistake of using the book values of debt and equity in his calculation. While you do not know
the book value weights he used, you have been provided with the following information:
(i) Company has a cost of equity of 12%,
(ii) After tax cost of debt is 6%,
(iii) The market value of equity is three times the book value of equity, while the market value
of debt is equal to the book value of debt.
You are required to estimate the correct value of the company.
Index Futures
1. Mr. Careless was employed with ABC Portfolio Consultants. The work profile of Mr.
Careless involves advising the clients about taking position in Future Market to obtain
hedge in the position they are holding. Mr. ZZZ, their regular client purchased 100,000
shares of X Inc. at a price of $22 and sold 50,000 shares of A plc for $40 each having beta 2.
Mr. Careless advised Mr. ZZZ to take short position in Index Future trading at $1,000
each contract.
Though Mr. Careless noted the name of A plc along with its beta value during discussion with
Mr. ZZZ but forgot to record the beta value of X Inc.
On next day Mr. ZZZ closed out his position when:
 Share price of X Inc. dropped by 2%
 Share price of A plc appreciated by 3%
 Index Future dropped by 1.5%
Mr. ZZZ, informed Mr. Careless that he has made a loss of $114,500 due to the position taken.
Since record of Mr. Careless was incomplete he approached you to help him to find the
number of contract of Future contract he advised Mr. ZZZ to be short to obtain a complete
hedge and beta value of X Inc.
You are required to find these values.

2. Mr. X, is a Senior Portfolio Manager at ABC Asset Management Company. He expects to

purchase a portfolio of shares in 90 days. However he is worried about the expected
price increase in shares in coming day and to hedge against this potential price increase he
decides to take a position on a 90-day forward contract on the Index. The index is
currently trading at 2290. Assuming that the continuously compounded dividend yield is 1.75%
and risk free rate of interest is 4.16%, you are required to determine:
a. Calculate the justified forward price on this contract.
b. Suppose after 28 days of the purchase of the contract the index value stands at 2450
then determine gain/ loss on the above long position.
c. If at expiration of 90 days the Index Value is 2470 then what will be gain on long
position.
Note: Take 365 days in a year and value of e0.005942 = 1.005960, e0.001849 = 1.001851.
3. Sensex futures are traded at a multiple of 50. Consider the following quotations of
Sensex futures in the 10 trading days during February, 2014:
Abshishek bought one sensex futures contract on February, 04. The average daily absolute
change in the value of contract is ` 10,000 and standard deviation of these changes is `
2,000. The maintenance margin is 75% of initial margin.
You are required to determine the daily balances in the margin account and payment on margin
calls, if any.
4. BSE 5000
Value of portfolio `10,10,000
Risk free interest rate 9% p.a.
Dividend yield on Index 6% p.a.
Beta of portfolio 1.5
index.
(iii) Value of Portfolio using CAPM.

5. Suppose current price of an index is `13,800 and yield on index is 4.8% (p.a.). A 6-
month future contract on index is trading at `14,340.
Assuming that Risk Free Rate of Interest is 12%, show how Mr. X (an arbitrageur) can
earn an abnormal rate of return irrespective of outcome after 6 months. You can assume that
after 6 months index closes at ` 10,200 and ` 15,600 and 50% of stock included in index shall pay
divided in next 6 months.
Also calculate implied risk free rate.
International Capital Budgeting
1. XY Limited is engaged in large retail business in India. It is contemplating for expansion

into a country of Africa by acquiring a group of stores having the same line of operation as
that of India.
The exchange rate for the currency of the proposed African country is extremely volatile. Rate
of inflation is presently 40% a year. Inflation in India is currently 10% a year.
Management of XY Limited expects these rates likely to continue for the foreseeable
future.
Estimated projected cash flows, in real terms, in India as well as African country for the
first three years of the project are as follows:
It evaluates all investments using nominal cash flows and a nominal discounting rate. The
present exchange rate is African Rand 6 to ` 1.
You are required to calculate the net present value of the proposed investment
considering the following:
(i) African Rand cash flows are converted into rupees and discounted at a risk adjusted
rate.
(ii) All cash flows for these projects will be discounted at a rate of 20% to reflect it’s high
risk.
(iii) Ignore taxation.
Year - 1 Year - 2 Year - 3
PVIF @ 20% .833 .694 .579

2. A multinational company is planning to set up a subsidiary company in India (where

hitherto it was exporting) in view of growing demand for its product and competition from
other MNCs. The initial project cost (consisting of Plant and Machinery including
installation) is estimated to be US$ 500 million. The net working capital requirements are
estimated at US$ 50 million. The company follows straight line method of depreciation.
Presently, the company is exporting two million units every year at a unit price of US$ 80, its
variable cost per unit being US$ 40.
The Chief Financial Officer has estimated the following operating cost and other data in respect
of proposed project:
(i) Variable operating cost will be US $ 20 per unit of production;
(ii) Additional cash fixed cost will be US $ 30 million p.a. and project's share of
allocated fixed cost will be US $ 3 million p.a. based on principle of ability to share;
(iii) Production capacity of the proposed project in India will be 5 million units;
(iv) Expected useful life of the proposed plant is five years with no salvage value;
(v) Existing working capital investment for production & sale of two million units through
exports was US $ 15 million;
(vi) Export of the product in the coming year will decrease to 1.5 million units in case
the company does not open subsidiary company in India, in view of the presence of
competing MNCs that are in the process of setting up their subsidiaries in India;
(vii) Applicable Corporate Income Tax rate is 35%, and
(viii) Required rate of return for such project is 12%.
Assuming that there will be no variation in the exchange rate of two currencies and all
profits will be repatriated, as there will be no withholding tax, estimate Net Present Value
(NPV) of the proposed project in India.
Present Value Interest Factors (PVIF) @ 12% for five years are as below:

Economic Value Added
1. ABC Ltd. has divisions A,B & C. The division C has recently reported on annual operating profit
of ` 20,20,00,000. This figure arrived at after charging ` 3 crores full cost of
advertisement expenditure for launching a new product. The benefits of this expenditure is
expected to be lasted for 3 years.
The cost of capital of division C is `11% and cost of debt is 8%.
The Net Assets (Invested Capital) of Division C as per latest Balance Sheet is ` 60 crore, but
replacement cost of these assets is estimated at `84 crore.
You are required to compute EVA of the Division C.
2. Consider the following operating information gathered from 3 companies that are
identical except for their capital structures:
a. Compute the weighted average cost of capital, WACC, for each firm.
b. Compute the Economic Value Added, EVA, for each firm.
c. Based on the results of your computations in part b, which firm would be considered the
best investment? Why?
d. Assume the industry P/E ratio generally is 15 ×. Using the industry norm, estimate the price
for each share.
e. What factors would cause you to adjust the P/E ratio value used in part d so that it is more
appropriate?

Equity Beta
1. The total market value of the equity share of O.R.E. Company is ` 60,00,000 and the
total value of the debt is ` 40,00,000. The treasurer estimate that the beta of the stock is currently
1.5 and that the expected risk premium on the market is 10 per cent. The Treasury bill
rate is 8 per cent.
Required:
(1) What is the beta of the Company’s existing portfolio of assets?
(2) Estimate the Company’s Cost of capital and the discount rate for an expansion of the
company’s present business.
Venture Capital Financing
1. TMC is a venture capital financier. It received a proposal for financing requiring an

investment of `45 crore which returns `600 crore after 6 years if succeeds. However, it may be
possible that the project may fail at any time during the six years.
The following table provide the estimates of probabilities of the failure of the projects.
In the above table the probability that the project fails in the second year is given that it has
survived throughout year 1. Similarly for year 2 and so forth.
TMC is considering an equity investment in the project. The beta of this type of project is 7. The
market return and risk free rate of return are 8% and 6% respectively. You are required
to compute the expected NPV of the venture capital project and advice the TMC.

Security Analysis
1. Following Financial data are available for PQR Ltd. for the year 2008:

(i) Draw income statement for the year
(ii) Calculate its sustainable growth rate
(iii) Calculate the fair price of the Company's share using dividend discount model, and
(iv) What is your opinion on investment in the company's share at current price?

2. The following data are available for a bond
Calculate the duration and volatility of this bond?
3. G holds securities as detailed herein below:
* Likelihood of being called (redeemed) at a premium over par.

Compute the current value of G’s portfolio.
4. Capital structure of Sun Ltd., as at 31.3.2003 was as under:
Sun Ltd., earns a profit of ` 32 lakhs annually on an average before deduction of income- tax,
which works out to 35%, and interest on debentures.
Normal return on equity shares of companies similarly placed is 9.6% provided:
a. Profit after tax covers fixed interest and fixed dividends at least 3 times.
b. Capital gearing ratio is 0.75.
c. Yield on share is calculated at 50% of profits distributed and at 5% on undistributed profits.
Sun Ltd., has been regularly paying equity dividend of 8%.
Compute the value per equity share of the company.

5. GHI Ltd., AAA rated company has issued, fully convertible bonds on the following terms, a
year ago:
AAA rated company can issue plain vanilla bonds without conversion option at an interest rate
of 9.5%.
Required: Calculate as of today:
(i) Straight Value of bond.
(ii) Conversion Value of the bond.
(iii) Conversion Premium.
(iv) Percentage of downside risk.
(v) Conversion Parity Price.
6. Closing values of BSE Sensex from 6th to 17th day of the month of January of the year 200X
were as follows:
Calculate Exponential Moving Average (EMA) of Sensex during the above period. The 30 days
simple moving average of Sensex can be assumed as 15,000. The value of exponent for 30
days EMA is 0.062.
Give detailed analysis on the basis of your calculations.

7. Two companies A Ltd. and B Ltd. paid a dividend of `3.50 per share. Both are
anticipating that dividend shall grow @ 8%. The beta of A Ltd. and B Ltd. are 0.95 and 1.42
respectively.
The yield on GOI Bond is 7% and it is expected that stock market index shall increase at an
annual rate of 13%. You are required to determine:
a. Value of share of both companies.
b. Why there is a difference in the value of shares of two companies.
c. If current market price of share of A Ltd. and B Ltd. are `74 and `55 respectively. As an
investor what course of action should be followed?
8. The data given below relates to a convertible bond:
Calculate:
(i) Stock value of good.
(ii) The percentage of downside risk.
(iii) The conversion premium
9. Delta Ltd.’s current financial year’s income statement reports its net income as ` 15,00,000.
Delta’s marginal tax rate is 40% and its interest expense for the year was ` 15,00,000. The
company has ` 1,00,00,000 of invested capital, of which 60% is debt. In addition, Delta Ltd.
tries to maintain a Weighted Average Cost of Capital (WACC) of 12.6%.
(i) Compute the operating income or EBIT earned by Delta Ltd. in the current year.
(ii) What is Delta Ltd.’s Economic Value Added (EVA) for the current year?
(iii) Delta Ltd. has 2,50,000 equity shares outstanding. According to the EVA you
computed in (ii), how much can Delta pay in dividend per share before the value of the
company would start to decrease? If Delta does not pay any dividends, what would
you expect to happen to the value of the company?
Market Price of Debenture ` 900
Conversion Ratio 30
Straight Value of Debenture ` 700
Market Price of Equity share on the date of Conversion ` 25
Expected Dividend Per Share `1
(i) Conversion Value of Debenture

(ii) Market Conversion Price

(iii) Conversion Premium per share
(iv) Ratio of Conversion Premium
(v) Premium over Straight Value of Debenture
(vi) Favourable income differential per share
(vii) Premium pay back period
11. The data given below relates to a convertible bond:
Calculate:
(i) Stock value of bond.
(ii) The percentage of downside risk.
(iii) The conversion premium
(iv) The conversion parity price of the stock
12. Rahul Ltd. has surplus cash of ` 100 lakhs and wants to distribute 27% of it to the
shareholders. The company decides to buy back shares. The Finance Manager of the
company estimates that its share price after re-purchase is likely to be 10% above the
buyback price-if the buyback route is taken. The number of shares outstanding at present is 10
lakhs and the current EPS is ` 3.
(i) The price at which the shares can be re-purchased, if the market capitalization of
the company should be ` 210 lakhs after buyback,
(ii) The number of shares that can be re-purchased, and
(iii) The impact of share re-purchase on the EPS, assuming that net income is the same.
Portfolio Theory
1. Suppose if Treasury Bills give a return of 5% and Market Return is 13%, then determine
(i) The market risk premium
(ii) β Values and required returns for the following combination of investments.

2. The following information is available of Jay Kay Ltd. and of Market (Index)
Compute Beta Value of the company at the end of the year 2005.
3. The following details are given for X and Y companies’ stocks and the Bombay Sensex for a
period of one year. Calculate the systematic and unsystematic risk for the companies’
stocks. What would be the portfolio risk if equal amount of money is allocated among these
stocks?
4. A study by a Mutual fund has revealed the following data in respect of three securities:
The standard deviation of market portfolio (BSE Sensex) is observed to be 15%.

(i) What is the sensitivity of returns of each stock with respect to the market?
(ii) What are the covariances among the various stocks?
(iii) What would be the risk of portfolio consisting of all the three stocks equally?
(iv) What is the beta of the portfolio consisting of equal investment in each stock?
(v) What is the total, systematic and unsystematic risk of the portfolio in (iv)?

5. An investor holds two stocks A and B. An analyst prepared ex-ante probability

distribution for the possible economic scenarios and the conditional returns for two stocks and
the market index as shown below:
The risk free rate during the next year is expected to be around 11%. Determine whether the
investor should liquidate his holdings in stocks A and B or on the contrary make fresh
investments in them. CAPM assumptions are holding true.
International Financial Management
1. Opus Technologies Ltd., an Indian IT company is planning to make an investment

through a wholly owned subsidiary in a software project in China with a shelf life of two years.
The inflation in China is estimated as 8 percent. Operating cash flows are received at the year
end.
For the project an initial investment of Chinese Yuan (CN¥) 30,00,000 will be in a piece of land.
The land will be sold after the completion of project at estimated value of CN¥ 35,00,000.
The project also requires an office complex at cost of CN¥ 15,00,000 payable at the beginning of
project. The complex will be depreciated on straight-line basis over two years to a zero salvage
value. This complex is expected to fetch CN¥ 5,00,000 at the end of project.
The company is planning to raise the required funds through GDR issue in Mauritius. Each
GDR will have 5 common equity shares of the company as underlying security which
are currently trading at ` 200 per share (Face Value = ` 10) in the domestic market. The
company has currently paid a dividend of 25% which is expected to grow at 10% p.a. The total
issue cost is estimated to be 1 percent of issue size.
The annual sales is expected to be 10,000 units at the rate of CN¥ 500 per unit. The price of unit
is expected to rise at the rate of inflation. Variable operating costs are 40 percent of
sales. Current Fixed Operating costs is CN¥ 22,00,000 per year which is expected to rise at the
rate of inflation.
The tax rate applicable in China for business income and capital gain is 25 percent and as per
GOI Policy no further tax shall be payable in India. The current spot rate of CN¥ 1 is `
9.50. The nominal interest rate in India and China is 12% and 10% respectively and the
international parity conditions hold.
You are required to
a. Identify expected future cash flows in China and determine NPV of the project in CN¥.
b. Determine whether Opus Technologies should go for the project or not, assuming that there
neither there is any restriction nor any charges/taxes payable on the transfer of funds
from China to India.

2. Odessa Limited has proposed to expand its operations for which it requires funds of $ 15
million, net of issue expenses which amount to 2% of the issue size. It proposed to raise the
funds though a GDR issue. It considers the following factors in pricing the issue:
i. The expected domestic market price of the share is ` 300
ii. 3 shares underly each GDR
iii. Underlying shares are priced at 10% discount to the market price
iv. Expected exchange rate is ` 60/$
You are required to compute the number of GDR's to be issued and cost of GDR to
Odessa Limited, if 20% dividend is expected to be paid with a growth rate of 20%.
Capital Budgeting with Risk
1. Jumble Consultancy Group has determined relative utilities of cash flows of two
forthcoming projects of its client company as follows :
The distribution of cash flows of project A and Project B are as follows:
Which project should be selected and why ?
2. A & Co. is contemplating whether to replace an existing machine or to spend money on

overhauling it. A & Co. currently pays no taxes. The replacement machine costs ` 90,000 now
and requires maintenance of ` 10,000 at the end of every year for eight years. At the end
of eight years it would have a salvage value of ` 20,000 and would be sold. The existing machine
requires increasing amounts of maintenance each year and its salvage value falls each year as
follows:
The opportunity cost of capital for A & Co. is 15%.

Required:
When should the company replace the machine?
(Notes: Present value of an annuity of ` 1 per period for 8 years at interest rate of 15% : 4.4873;
present value of ` 1 to be received after 8 years at interest rate of 15% : 0.3269).
3. XYZ Ltd. is planning to procure a machine at an investment of ` 40 lakhs. The expected

cash flow after tax for next three years is as follows:
` (in lakh)
The Company wishes to consider all possible risks factors relating to the machine.
The Company wants to know:
(i) the expected NPV of this proposal assuming independent probability distribution with
7% risk free rate of interest.
(ii) the possible deviations on expected values.
Foreign Exchange Management
1. Columbus Surgicals Inc. is based in US, has recently imported surgical raw materials
from the UK and has been invoiced for £ 480,000, payable in 3 months. It has also
exported surgical goods to India and France.
The Indian customer has been invoiced for £ 138,000, payable in 3 months, and the
French customer has been invoiced for € 590,000, payable in 4 months.
Current spot and forward rates are as follows:
£ / US$
Spot: 0.9830 – 0.9850
Three months forward: 0.9520 – 0.9545
US$ / €
Spot: 1.8890 – 1.8920
Four months forward: 1.9510 – 1.9540
Current money market rates are as follows:
UK: 10.0% – 12.0% p.a.
France: 14.0% – 16.0% p.a.
USA: 11.5% – 13.0% p.a.
You as Treasury Manager are required to show how the company can hedge its foreign
exchange exposure using Forward markets and Money markets hedge and suggest which
the best hedging technique is.

2. ABN-Amro Bank, Amsterdam, wants to purchase `15 million against US$ for funding
their Vostro account with Canara Bank, New Delhi. Assuming the inter-bank, rates of
US$ is `51.3625/3700, what would be the rate Canara Bank would quote to ABN-Amro Bank?
Further, if the deal is struck, what would be the equivalent US$ amount.
Commodity Futures
1. A company is long on 10 MT of copper @ ` 474 per kg (spot) and intends to remain so for the
ensuing quarter. The standard deviation of changes of its spot and future prices are 4% and 6%
respectively, having correlation coefficient of 0.75.
What is its hedge ratio? What is the amount of the copper future it should short to
achieve a perfect hedge?
Interest Rate Guarantee
1. Two companies ABC Ltd. and XYZ Ltd. approach the DEF Bank for FRA (Forward Rate
Agreement). They want to borrow a sum of ` 100 crores after 2 years for a period of 1 year. Bank
has calculated Yield Curve of both companies as follows:
*The difference in yield curve is due to the lower credit rating of ABC Ltd. compared to XYZ
Ltd.
i. You are required to calculate the rate of interest DEF Bank would quote under 2V3 FRA,
using the company’s yield information as quoted above.
ii. Suppose bank offers Interest Rate Guarantee for a premium of 0.1% of the amount of loan,
you are required to calculate the interest payable by XYZ Ltd. if interest in 2 years turns out
to be
a. 4.50%
b. 5.50%
Bond Refunding
1. M/s Transindia Ltd. is contemplating calling ` 3 crores of 10 years, ` 1,000 bond issued 5 years
ago with a coupon interest rate of 14 per cent. The bonds have a call price of ` 1,015 and had
initially collected proceeds of ` 2.91 crores due to a discount of ` 30 per bond. The initial floating
cost was ` 3,60,000. The Company intends to sell ` 3 crores of 12 per cent coupon rate, 5
years bonds to raise funds for retiring the old bonds. It proposes to sell the new bonds
at their par value of ` 1,000. The estimated floatation cost is ` 2,00,000. The company is
paying 40% tax. The new bonds shall be issued 2 months before retiring old bonds to
avoid any market risk and using the proceeds from new issue to retire the old bonds. What
is the feasibility of refunding bonds?

Right Issue
1. Pragya Limited has issued 75,000 equity shares of ` 10 each. The current market price per share
is ` 24. The company has a plan to make a rights issue of one new equity share at a
price of ` 16 for every four share held.
(i) Calculate the theoretical post-rights price per share;
(ii) Calculate the theoretical value of the right alone;
(iii) Show the effect of the rights issue on the wealth of a shareholder, who has 1,000 shares
assuming he sells half of his rights; and exercise the remaining 50%.
(iv) Show the effect, if the same shareholder does not take any action and ignores the issue.
Business Valuation
1. A valuation done of an established company by a well-known analyst has estimated a

value of ` 525 lakhs, based on the current year’s free cash flow of ` 20 lakhs and an
expected growth rate of 5%.
While going through the valuation procedure, you found that the analyst has made the
mistake of using the book values of debt and equity in his calculation. While you do not know
the book value weights he used, you have been provided with the following information:
(i) Company has a cost of equity of 12%,
(ii) After tax cost of debt is 6%,
(iii) The market value of equity is three times the book value of equity, while the market
value of debt is equal to the book value of debt.
You are required to estimate the correct value of the company.
Valuation
1. T Ltd. Recently made a profit of ` 50 crore and paid out ` 40 crore (slightly higher than the
average paid in the industry to which it pertains). The average PE ratio of this industry
is 9. As per Balance Sheet of T Ltd., the shareholder’s fund is ` 225 crore and number of shares is
10 crore. In case company is liquidated, building would fetch ` 100 crore more than book value
and stock would realize ` 25 crore less.
The other data for the industry is as follows:
Projected Dividend Growth 4%
Risk Free Rate of Return 6%
Market Rate of Return 11%
Average Dividend Yield 6%
The estimated beta of T Ltd. is 1.2. You are required to calculate valuation of T Ltd. using
(i) P/E Ratio
(ii) Dividend Yield
(iii) Valuation as per:
a. Dividend Growth Model
b. Book Value
c. Net Realizable Value

FOREX
1. On 1st January 2019 Global Ltd., an exporter entered into a forward contract with BBC
Bank to sell US$ 2,00,000 on 31st March 2019 at ` 71.50/$. However, due to the request of
the importer, Global Ltd. received the amount on 28 February 2019. Global Ltd. requested
the Bank to take delivery of the remittance on 2nd March 2019. The Inter- banking rates on 28th
February were as follows:
If Bank agrees to take early delivery then what will be the net inflow to Global Ltd. assuming
that the prevailing prime lending rate is 15%. Assume 365 days in a year.
2. KGF Bank's Sydney branch has surplus funds of USD $ 7,00,000 for a period of 2 months. Cost
of funds to the bank is 6% p.a. They propose to invest these funds in Sydney, New York or
Tokyo and obtain the best yield, without any exchange risk to the bank. The Following
rates of interest are available at the three centres for investment of domestic funds there for
a period of 2 Months.
The market rates in Australia for US Dollars and Yen are as under: Sydney on New York:
Sydney on Tokyo:
At which centre, will the investment be made & what will be the net gain to the bank on the
invested funds?

PORTFOLIO MANAGEMENT
TR, SR AND UR OF A PORTFOLIO
1. Following are the details of a portfolio consisting of 3 shares:
Standard Deviation of Market Portfolio Return = 12%

You are required to calculate the following:
i. The Portfolio Beta.
ii. Residual Variance of each of the three shares.
iii. Portfolio Variance using Sharpe Index Model.
ASSET BETA AND EQUITY BETA
2. Equity of KGF Ltd. (KGFL) is ` 410 Crores, its debt, is worth ` 170 Crores. Printer Division
segments value is attributable to 74%, which has an Asset Beta (βp) of 1.45, balance value is
applied on Spares and Consumables Division, which has an Asset Beta (βsc) of 1.20 KGFL
Debt beta (βD) is 0.24.
i. Equity Beta (βE),
ii. Ascertain Equity Beta (βE), if KGF Ltd. decides to change its Debt Equity position by raising
further debt and buying back of equity to have its Debt Equity Ratio at 1.90. Assume that the
present Debt Beta (βD1) is 0.35 and any further funds raised by way of Debt will have a Beta
(βD2) of 0.40.
iii. Whether the new Equity Beta (βE) justifies increase in the value of equity on account of
leverage?
BETA MANAGEMENT
3. Ms. Preeti, a school teacher, after retirement has built up a portfolio of ` 1,20,000 which is as
follow:
Her portfolio consultant Sri Vijay has advised her to bring down the, beta to 0.8. You are
required to compute:
i. Present portfolio beta
ii. How much risk free investment should be bought in, to reduce the beta to 0.8 ?

EQUITY & BOND VALUATION
EVA
1. Compute Economic Value Added (EVA) of Good luck Ltd. from the following information:
Profit & Loss Statement
Balance Sheet
Other Information:
1. Cost of Debts is 15%.
2. Cost of Equity (i.e. shareholders' expected return) is 12%.
3. Tax Rate is 30%.

4. Bad Debts Provision of ` 40 lakhs is included in indirect expenses and ` 40 lakhs reduced
from receivables in current assets.
MULTIPLE GROWTH DDM
2. The shares of G Ltd. we currently being traded at ` 46. The company published its results for
the year ended 31st March 2019 and declared a dividend of ` 5. The company made a return of
15% on its capital and expects that to be the norm in which it operates. G Ltd. Also expects
the dividends to grow at 10% for the first three years and thereafter at 5%.
You are required to advise whether the share of the company is being traded at a premium or
discount.
PVIF @ 15% for the next 3 years is 0.870, 0.756 and 0.658 respectively.
3. An investor is considering purchasing the equity shares of LX Ltd., whose current market price
(CMP) is 150. The company is proposing a dividend of ` 6 for the next year. LX is expected to
grow @ 18 per cent per annum for the next four years. The growth will decline linearly to 14 per
cent per annum after first four years. Thereafter, it will stabilize at 14 per cent per annum
infinitely. The required rate of return is 18 per cent per annum.
i. The intrinsic value of one share
ii. Whether it is worth to purchase the share at this price
BUY BACK
4. ABB Ltd. has a surplus cash balance of ` 180 lakhs and wants to distribute 50% of it to the
equity shareholders. The company decides to buyback equity shares. The company estimates
that its equity share price after re-purchase is likely to be 15% above the buyback price. if the
buyback route is taken.
Other information is as under:
1. Number of equity shares outstanding at present (Face value ` 10 each) is ` 20 lakhs.
2. The current EPS is ` 5.
i. The price at which the equity shares can be re-purchased, if market capitalization of the
company should be ` 400 lakhs after buy back.
ii. Number of equity shares that can be re-purchased.
iii. The impact of equity shares re-purchase on the EPS, assuming that the net income remains
unchanged.

ACCOUNTING BASED VALUATION
5. Following financial information’s are available of XP Ltd. for the year 2018:

i. Prepare Income Statement for the year 2018.
ii. Determine its Sustainable Growth Rate.
iii. Determine the fair price of the company's share using Dividend Discount Model.
iv. Give your opinion on investment in the company's share at current price.
6. The closing price of LX Ltd. is `24 per share as on 31st March, 2019 on NSE Ltd. The Price
Earnings Ratio was 6. It was found that an amount of `24 Lakhs as income and an extra
ordinary loss of `9 lakhs were included in the books of accounts. The existing operations except
for the extraordinary items are expected to continue in future. Further the company has
launched a new product during the year with the following expectations:
The company has 500,000 equity shares of ` 10 each and 100,000 9% Preference Shares of ` 100
each. The Price Earnings Ratio is 6 times. Post tax cost of capital is 10 per cent per annum. Tax
rate is 34 per cent.
i. Existing Profit from old operations
ii. The value of business

MUTUAL FUND
1. A Mutual Fund Company introduces two schemes - Dividend Plan and Bonus Plan. The
face value of the Unit is `10 on 1-4-2014. Mr. R invested ` 5 lakh in Dividend Plan and
` 10 lakh in Bonus Plan. The NAV of Dividend Plan is ` 46 and NAV of Bonus Plan is
` 42. Both the plans matured on 31-03-2019. The particulars of Dividend and Bonus
declared over the period are as follows:
You are required to calculate the effective yield per annum in respect of the above two
plans.
2. The following particulars relating to Vishnu Fund Schemes:

Particulars relating to each sector are as follows:
The fund has incurred the following expenses:

Consultancy and Management fees ` 480 Lakhs
Office Expenses ` 150 Lakhs
Advertisement Expenses ` 38 Lakhs
i. Net Asset Value of the fund
ii. Net Asset Value per unit
iii. If the period of consideration is 2 years, and the fund has distributed ` 3 per unit per year
as cash dividend, ascertain the Net return (Annualized).
iv. Ascertain the Expenses ratio.
3. A mutual fund has two schemes i.e. Dividend plan (Plan-A) and Bonus plan (Plan-B). The face
value of the unit is ` 10. On 01/04/2016 Mr. Anand invested ` 5,00,000 each in Plan- A and
Plan-B when the NAV was ` 46.00 and ` 43.50 respectively, Both the Plans matured on
31/03/2019.
Particulars of dividend and bonus declared over the period are as follows:
You are required to calculate the Effective Yield Per annum in respect of the above two plans.

MERGER
1. Given is the following information:
The shares of Day Ltd. and Night Ltd. trade at 20 and 15 times their respective P/E ratios.
Day Ltd. considers taking over Night Ltd. By paying ` 55 crores considering that the market
price of Night Ltd. reflects its true value. It is considering both the following options:
i. Takeover is funded entirely in cash.
ii. Takeover is funded entirely in stock.
You are required to calculate the cost of the takeover and advise Day Ltd. on the best
alternative.
2. R Ltd. and S Ltd. operating in same industry are not experiencing any rapid growth but
providing a steady stream of earnings. R Ltd.'s management is interested in acquisition of S.
Ltd. due to its excess plant capacity. Share of S Ltd. is trading in market at ` 3.20 each. Other
data relating to S Ltd. is as follows:
Balance Sheet of S Ltd.
You are required to compute the following:

i. Minimum price per share S Ltd. should accept from R Ltd.
ii. Maximum price per share R Ltd. shall be willing to offer to S Ltd.
iii. Floor Value of per share of S Ltd., whether it shall play any role in decision for its acquisition
by R Ltd.

DERIVATIVES
OPTION STRATEGIES
1. The equity share of SSC Ltd. is quoted at ` 310. A three month call option is available at a
premium of ` 8 per share and a three month put option is available at a premium of ` 7 per
share.
Ascertain the net payoffs to the option holder of a call option and a put option,
considering that:
i. the strike price in both cases is ` 320; and
ii. the share price on the exercise day is ` 300, 310, 320, 330 and 340.
Also indicate the price range at which the call and the put options may be gainfully
exercised.
2. Mr. KK purchased a 3-month call option for 100 shares in PQR Ltd. at a premium of ` 40 per
share, with an exercise price of ` 560. He also purchased a 3-month put option for 100 shares of
the same company at a premium of ` 10 per share with an exercise price of ` 460. The market
price of the share on the date of Mr. KK's purchase of options, is ` 500. Compute the profit or
loss that Mr. KK would make assuming that the market price falls to ` 360 at the end of 3
months.
OPTION PRICE BASICS
3. A mutual fund raised ` 150 lakhs on April 1, 2018 by issue of 15 lakh units at ` 10 per unit. The
fund invested in several capital market instruments to build a portfolio of ` 140 lakhs, Initial
expenses amounted to ` 8 lakhs. During the month of April, the fund sold certain instruments
costing ` 44.75 lakhs for ` 47 lakhs and used the proceeds to purchase certain other securities for
` 41.6 Iakhs. The fund management expenses for the month amounted to ` 6 lakhs of which
` 50,000 was in arrears. The fund earned dividends amounting to ` 1.5 lakhs and it distributed
80% of the realized earnings. The market value of the portfolio on 30th April, 2018 was
` 147.85 Iakhs.
An investor subscribed to 1000 units on April 1 and disposed it off at closing NAV on 30th
April. Determine his annual rate of earnings.
OPTION STRATEGIES
4. Mr. John established the following spread-on the TTK Ltd.'s stock:
1. Purchased one 3-month put option with a premium of ` 15 and an exercise price of ` 900.
2. Purchased one 3-month call option with a premium of ` 90 and an exercise price of ` 1100.
TTK Ltd.'s stock is currently selling at ` 1000. Calculate gain or loss, if the price of stock
of TTK Ltd. -
i. Remains at ` 1000 after 3 months,
ii. Falls to ` 700 after 3 months.
iii. Raises to ` 1200 after 3 months.
Assume the size of option is 200 shares of TTK Ltd.

FUTURE HEDGING
5. A Rice Trader has planned to sell 22000 kg of Rice after 3 months from now. The spot price of
the Rice is ` 60 per kg and 3 months future on the same is trading at ` 59 per kg. Size
of the contract is 1000 kg. The price is expected to fall as low as ` 56 per kg, 3 months
hence. What the trader can do to mitigate its risk of reduced profit ? If he decides to make
use of future market, what would be the effective realized price for its sale when after 3
months, spot price is ` 57 per kg and future contract price for 3 months is ` 58 per kg?
OPTION HEDGING
6. Sun Limited, an Indian company will need $ 5,00,000 in 90 days. In this connection,
following information is given below:
Spot Rate - $1 = ` 71
90 days forward rate of $1 as of today = `73
Interest Rates are as follows :
Particulars US India
90 days Deposit Rate 2.50% 4.00%
90 days Borrowing Rate 4.00% 6.00%
A call option on $ that expires in 90 days has an exercise price of ` 74 and a premium of Re. 0.10.
Sun Limited has forecasted the spot rates for 90 days as below :
Future Rate Probability

` 72.50 25%
` 73.00 50%
` 74.50 25%
Which of the following strategies would be the most preferable to Sun Limited :
i. A Forward Contract;
ii. A Money Market Hedge;
iii. An Option Contract;
iv. No Hedging.
Show your calculations in each case.
FUTURE HEDGING
7. DSE Ltd. is an export oriented business in Kolkata, DSE Ltd. invoices in customers
currency. Its receipts of US $ 3,00,000 is due on July 1st 2019.
Market information as at April 1st 2019

On July, the spot rate US $/` is 0.0146 and currency future rate is 0.0147. Comment which of the
following methods would be most advantageous for DSE Ltd.
i. Using forward contract.
ii. Using currency futures
iii. Not hedging currency risks.
It may be assumed that variation in margin would be settled on the maturity of the
futures contract.
BETA MANAGEMENT
8. On April 1,2019, Kasi has a portfolio consisting of four securities as shown below :
Cost of Capital is 16% p.a. compounded continuously. Kasi fears a fall in prices of
shares in future. Accordingly, he approaches you for the advice to protect the interest of
his Portfolio.
You can make use of the following information :
1. The current NIFTY Value is 9380.
2. NIFTY Futures can be traded in units of 25 only.
3. Futures for September are currently quoted at 9540 and Futures for October are being
quoted at 9820.
You are required to calculate :
i. The Beta of his Portfolio.
ii. Theoretical Value of Futures for contracts expiring in September & October.
iii. The number of NIFTY Contract that he would have to sell, if he desires to hedge
150% of the Portfolio until October.

INTEREST RATE RISK MANAGEMENT
Swap Valuation
1. The following information is taken from the books of a bank relating to an interest rate swap
Remaining term to maturity 3 years
Fixed rate paid by bank 10%
Floating rate received by bank 6m Libor
Current 6m Libor 9%
Market quote for 3 year swap 10.5% semi-annual vs. Libor
Find out the value of the swap, if the bank has received the latest interest payment.
2. Monte Carlo Garments Ltd., a large export house from India entered into a five-year interest
rate swap with the State Bank of India, under which it has contracted to pay 10% and receive
six-month LIBOR semi- annually, on a notional principal amount of US $ 10 million. This deal
was set-up on July 1, 1999. On July 1, 2001, after the swap payments were settled, the Finance
Manager suggested that the swap be cancelled as the rates in the market have dropped
considerably. He approached the bank, which agreed to cancel the deal at 8%, which is also the
current rate for the 3 years swap deal for fixed vs LIBOR.
You are required to find out the following:
a. If the deal was to be cancelled on July 1, 2001, what amount of money would be required to
be paid? By whom?
b. Instead of canceling the existing deal, if a new deal was made and allowed to run for 3 years
(till the maturity of the original deal), what would be the cash-flow on the fixed leg of the
new deal? (Assume that each period is exactly 6 months).
3. Consider the following information relating to a swap deal with a notional amount of $500
million entered by a client with a swap bank:
Remaining term to maturity 4 year 9 months
Reset frequency Semi-annual
Interest rate of the fixed leg 4%
Interest rate of the floating leg LIBOR
LIBOR applicable to the current half- year 3.25%
Present market quote for a 5-year swap 5-year US T-note yield + 20/30 bp vs LIBOR
Current yield on 5- year US T- note 3.10%
Current 3-month LIBOR 2.95%
Considering that the client pays the fixed leg, you are required to find out value of the swap.

4. The borrowing requirements of two companies APCO Ltd. and PATCO Ltd. as well as the
lending terms available to them in different markets are given as under:
Firm Objective Lending term available Maturity
Fixed Floating interest
interest
APCO US$ 100 mln. at fixed rate 9% 6m LIBOR + 0.75% 5 years
PATCO US$ 100 mln. at floating rate 8% 6m LIBOR + 0.25% 5 years
You are required to

a. Explain how to go about a swap in order to reduce their borrowing cost. Show the same
with a diagram.
b. What are the risks involved in this swap?
5. A corporation enters into a $10 million notional principal interest rate swap. The swap calls for a
corporation to pay fixed rate and receive floating rate on LIBOR. The payment will be made
every 90 days for one year and will be based on the adjustment factor 90/360. The term
structure of LIBOR when the swap is initiated is as follows:
Days 90 180 270 360
Rate (%) 7.00 7.25 7.45 7.55
Note that at the initiation of the swap, the fixed rate is set at such a rate that the value of the
swap is zero.
a. Determine the fixed rate on the swap.
b. Calculate the first net payment on the swap.
6. Consider the following information relating to a swap deal with a notional amount of $ 100
million entered by a client with a swap bank:
Remaining term to maturity 4 year 9 months
Reset frequency Semi-annual
Interest rate of the fixed leg 4%
Interest rate of the floating leg LIBOR
LIBOR applicable to the current 3.25%
half- year
Present market quote for a 5-year swap 5-year US T-note yield + 20/30
bp vs LIBOR
Current yield on 5- year US T- note 3.10%
Current 3-month LIBOR 2.95%
Considering that the client pays the fixed leg, you are required to find out whether the client
should continue in the swap.

7. A swap bank is looking at the following expected futures prices to determine the swap rate of a
five-year swap:
Payment T-bill Eurodollar
dates futures price futures
(Years) ($)* price ($)*
0.5 0.9756 0.9769
1.0 0.9624 0.9658
1.5 0.9445 0.9482
2.0 0.9362 0.9495
2.5 0.9235 0.9274
3.0 0.9179 0.9202
3.5 0.9043 0.9090
4.0 0.8826 0.8863
4.5 0.8695 0.8728
5.0 0.8443 0.8487
* Present value for the futures price of one dollar.
You are required to determine the break-even swap rate on a five-year swap, where the bank
will receive fixed payments and pay floating rate payments.
8. Cavin Cally Ltd., a large export house from India entered into a five-year interest rate swap with
the ICICI Bank, under which it has contracted to pay 8% and receive six-month LIBOR semi-
annually, on a notional principal amount of US $ 25 million. This deal was set-up on April 01,
2003. On April 01, 2005, after the swap payments were settled, the Treasurer of Cavin Cally
suggested that the swap be cancelled as the rates in the market have dropped considerably. He
approached the bank, which agreed to cancel the deal at 6%, which is also the current rate for
the 3 years swap deal for fixed vs LIBOR.
You are required to find out the following:
a. If the deal was to be cancelled on April 1, 2005, what amount of money would be required to
be paid? By whom?
b. Instead of canceling the existing deal, if a new deal was made and allowed to run for 3 years
(till the maturity of the original deal), what would be the cash flow on the fixed leg of the
new deal? (Assume that each period is exactly 6 months).
9. Ziemenns GmbH, a German firm, is in need of $200 million for its foreign investment
requirements for 5 years. A US firm, Sandvik Inc., needs an amount of €160 million for its
European operations for 5 years. Following information is available for borrowings in different
markets for both the parties:
Firm US market ($) Euro market (€)
Ziemenns GmbH 8% 6%
Sandvik Inc. 7% 8%
Both the firms swap their borrowings to meet their requirements. After a year interest rates have
dropped uniformly by 75 bp in US market and by 50 bp in Euro market. At the end of the first
year, you are required to find out

(i) Dollar value of the swap to Sandvik

(ii) Euro value of the swap to Ziemenns
Spot rate at the time of entering in to swap was $ 1.25/€ and spot rate after a year is $ 1.22/€.
Swap Structuring
10. Asterix Inc. had raised floating rate funds two years ago at 6-month Prime + 1.25%. Now it
wants to convert this liability into fixed rate funding for 3 years. It approaches Bank of New
York for a swap. Bank of New York is quoting 6-month Prime/Fixed rate swap at 80/100 basis
points over 5-year US treasuries which are yielding 4.55%. The Bank agrees to do the swap with
Asterix.
Bank of London is launching a Eurobond issue at a fixed dollar cost of 5.25%. The bank prefers a
6-month LIBOR based funding. Bank of New York is quoting 6-month LIBOR/Fixed rate swap
at 100/125 basis points over 5 year US treasuries. The Bank of London entered into a fixed-to-
floating rate swap with Bank of New York.
Bank of Riverside has Prime based assets funded with LIBOR based deposits. It wants to
remove the mismatch of its assets and liabilities. It is willing to pay 6 month Prime + 0.25% in
return for 6 month LIBOR.
a. Calculate the fixed rate achieved by Asterix by entering into the swap.
b. Mention what are the risks taken up by the Bank of New York by entering into swap with
Asterix?
c. Calculate the floating rate cost achieved by the Bank of London.
d. Show the assets and liabilities position of Bank of New York after entering into swap with
Asterix and Bank of London. Does the swap with Bank of Riverside helps the Bank of New
York?
e. Find out the net gain of Bank of New York after all the three swaps. Show all the swaps
entered by the Bank of New York through a diagram.
Foreign Currency Swap Valuation
11. Deutsche AG, a German firm, is in need of $200 million for its foreign operations for 5 years. A
US firm, Invensys Inc., needs an amount of Euro 160 million for its European operations for 5
years. Following information is available for borrowings in different markets for both the
parties:
Firm Eurodollar Euro market
market
Deutsche AG 5% p.(a) 6% p.(a)
Invensys In(c) 4% p.(a) 7% p.(a)
Both the firms swap their borrowings to meet their requirements. After a year interest rates have
dropped by 150 bp in Eurodollar market and by 100 bp in Euro market. At the end of first year
you are required to find out

i. Value of the swap to Invensys Inc.

ii. Value of the swap to Deutsche AG.
Spot rate at the time of entering into swap was $1.25/Euro and spot rate after one year is
$1.20/Euro.
T - Bond Futures
12. A fund manager in the USA is holding 50 US Treasury bonds of 18 years and 9 months to
maturity. Current quotes in the market are as follows:
Price of T- bond 131-02
Coupon rate 12%
Conversion factor 1.3782
The fund manager is concerned about a potential rise in interest rate and has decided to fully
hedge the portfolio through Treasury bond futures. He has decided to protect the portfolio for 3
months and identified the following T – bond futures for hedging:
T – bond futures price 94-22
Short term financing rate 8% p.a.
You are required to
a. Suggest the fund manager whether to buy or sell the futures, and how many futures contract
to be used?
b. Calculate the annualized return earned on the portfolio if the T- bond price and futures price
after 3- month closes at
i. 130-05, 94-03
ii. 131-31, 94-45.
13. An American investor is holding 25 US T-bonds of remaining maturity 18 years. Underlying

interest on the bond is 5.5% and the bond is currently quoted in the market at 90-12.
The interest rates in the American economy are set to rise in near future, so the investor wants to
hedge its holding of bonds through T-bond futures. The investor has decided to protect his
holding for 6-months and identified the following T-bond futures for hedging:
T-bond futures price 94-24
Underlying coupon rate 6% p.a.
You are required to
a. Advise the investor how to hedge the holding through T-bond futures, and how many
futures contract required for perfect hedge?
b. Calculate the annualized return earned on the holding for the protection period, if T-bond
price and futures price after 6-months closes at
i. 92-26, 97-08
ii. 88-06, 92-22
14. Consider a one-year put swaption, which has an underlying swap as a four-year swap. A put
swaption gives its buyer the right to enter into a swap as a floating rate payer and if he exercises
the option, receives fixed rate from the swap. The strike price of the put swaption is 9% and the

notional principal is $10 million. At expiration of the swaption, the spot rates on zero coupon
bonds of various maturities turned out as below:
Year Yield on Zero Coupon Bond
1 7.5%
2 8.0%
3 8.4%
4 8.7%
You are required to calculate the payoff from the put swaption. (Assume 360 days in a year).
CAP & FLOOR
15. A treasurer of a multinational company has invested $10 million in a 5-year FRN which pays a
semi-annual interest of 0.25% over 6 month LIBOR. The 6 month LIBOR for the first semester is
fixed at 3.25%. The treasurer believes that the Federal Reserve will reduce the dollar interest rate
in the future. To hedge the interest rate risk, the treasurer has also purchased a 5 year floor on 6
month LIBOR at a strike price of 3% by paying premium of 2% on the face value of $10 million.
You are required to compute the effective rate of return on the investment showing all the cash
flows if the 6 months LIBOR at the next 9 reset days turns out to be : 3.08%, 2.90%, 2.75%, 2.60%,
2.50%, 2.45%, 2.80%, 3.05%, 3.15% respectively. (Use a discount rate of 3% to amortize the
premium)
16. An Indian company has raised a 5-year sterling loan of £50 million at 6-month LIBOR + 50 bp.
The company has decided to hedge the interest rate risk through an interest rate collar. The
company has identified the following cap and floor quoted by an European bank:
Cap Floor
Term 5-years 5-years
Underlying interest rate 6-m LIBOR 6-m LIBOR
Reset dates January 01, July 01 January 01, July 01
Strike rate 5% 4%
Premium 2% 1%
Face value £50 million £50 million
You are required to compute the effective cost of the loan after hedging through collar showing
all the cash-flows if the 6 month LIBOR for the 10 semi-annual periods turned out as 4.60%,
4.15%, 3.90%, 3.60%, 3.75%, 4.50%, 5.10%, 5.25%, 5.50% and 5.80%. (Amortize the premium
using a discount rate of 4.50%).
17. An American Company has decided to raise a 5-year floating rate loan of $100 million. The loan
is indexed to 6 month LIBOR with a spread of 40 basis points. The current level of 6-month
LIBOR is 3.20%. A 5-year interest rate cap on face value $100 million with strike price 3.50% is
quoted in the market at a premium of 1.5%, which the company thinks is very high. It also
identified a 5-year interest rate floor on face value $100 million with strike price 3% is available
for a premium of 1%.

You are required to state how the company can hedge its interest rate exposure through those
interest rate cap and floor. Also calculate the effective cost of the loan showing all the relevant
cash flows if the 6 months LIBOR for the next 9 rollover dates turned out as: 3.05%, 2.90%,
2.78%, 2.96%, 3.35%, 3.60%, 3.70%, 3.90%, 4.10%.
(You can assume a discount rate of 3.50% for amortizing the premium.)
18. A European company has decided to take a 5-year floating rate loan of $250 million to finance
its acquisition. The loan is indexed to 6 months LIBOR with a spread of 50 basis points.
The company has identified the following caps and floors quoted by a European bank:
Term Cap Floor
5-years 5-years 5-years 5-years
Underlying 6-m LIBOR 6-m LIBOR 6-m LIBOR 6-m LIBOR
interest rate
Strike rate 3.0% 3.5% 3.0% 3.5%
Premium 2.0% 1.5% 1.2% 2.0%
Face value $250 million $250 million $250 million $250 million
You are required to state how the company can hedge its interest rate exposure by using an
interest rate Collar strategy. Also calculate the effective cost of the loan showing all the relevant
cash flows if the 6 months LIBOR at the 10 reset dates turn out to be: 3.60%, 4.00%, 3.55%, 3.40%,
2.90%, 2.80%, 2.65%, 2.75%, 3.00% and 3.25%.
(Use a discount rate of 4% to amortize the premium)
GENERIC SWAP
19. A dealer quotes 'All-in-cost' for a generic swap at 6% against six month LIBOR flat. If the
notional principal amount of swap is ` 8,00,000:
i. Calculate semi-annual fixed payment.
ii. Find the first floating rate payment for (i) above if the six month period from the
effective date of swap to the settlement date comprises 181 days and that the
corresponding LIBOR was 5% on the effective date of swap.
iii. In (ii) above, if the settlement is on 'Net' basis, how much the fixed rate payer would
pay to the floating rate payer? Generic swap is based on 30/360 days basis.
OIS
20. Punjab Bank has entered into a plain vanilla swap through on Overnight Index Swap (OIS) on a
principal of ` 2 crore and agreed to receive MIBOR overnight floating rate for a fixed payment
on the principal. The swap was entered into on Monday, 24th July, 2017 and was to commence
on 25th July, 2017 and run for a period of 7 days.
8.70%, 9.10%, 9.12%, 8.95%, 8.98% and 9.10%.

If Punjab Bank received ` 507 net on settlement, calculate Fixed rate and interest under both
legs.
Notes:
i. Sunday is a Holiday.
ii. Workout in rounded rupees and avoid decimal working.
iii. Consider a year consists of 365 days.
SWAP STRUCTURING
21. K Ltd. currently operates from 4 different buildings and wants to consolidate its operations into
one building which is expected to cost ` 90 crores. The Board of
K Ltd. had approved the above plan and to fund the above cost, agreed to avail an External
Commercial Borrowing (ECB) of GBP 10 m from G Bank Ltd. on the following conditions :
 The Loan will be availed on 1st April, 2019 with interest payable on half yearly rest.
 Average Loan Maturity life will be 3.4 years with an overall tenure of 5 years.
 Upfront Fee of 1.20%.
 Interest Cost is GBP 6 months LIBOR + Margin of 2.50%.
 The 6 month LIBOR is expected to be 1.05%.
K Ltd. also entered into a GBP-INR hedge at 1 GBP = INR 90 to cover the exposure on account of
the above ECB Loan and the cost of the hedge is coming to 4.00% p.a.
As a Finance Manager, given the above information and taking the 1 GBP = INR 90:
i. Calculate the overall cost both in percentage and rupee terms on an annual basis.
ii. What is the cost of hedging in rupee terms ?
iii. If K Ltd. wants to pursue an aggressive approach, what would be the net gain/loss for K
Ltd. if the INR depreciates/appreciates against GBP by 10% at the end of the 5 years
assuming that the loan is repaid in GBP at the end of 5 years?
Ignore time value and taxes and calculate to two decimals.
TWO PARTY SWAP
22. IM is an American firm having its subsidiary in Japan and JI is a Japanese firm. having its
subsidiary in USA. They face the following interest rates.
IM wishes to borrow USD at floating rate and JI JY at fixed rate. The amount required by both
the companies is same at the current Exchange Rate. A financial institution requires 75
basis points as commission for arranging Swap. The companies agrees to share the benefit/loss
equally.
You are required to find out
i. Whether a beneficial swap can be arranged?
ii. What rate of interest for both IM and JI?

RISK MANAGEMENT
VaR
1. Mr. Pranoy has recently purchased 100 shares of Super Tools Ltd. at Rs.300 per share. The
volatility of the stock is 15% per annum. Mr. Pranoy has decided to hold the shares for 6
months. The 6-month European call option on the shares of Super Tools Ltd. is available at Rs.28
per share. The contract size for the option is 100 shares and the delta of call option is 0.35.
You are required to calculate for 90% confidence level
a. VaR for long stock position
b. VaR for long call option position
(Assume 250 trading days in a year).
2. Mr. Binoy has invested Rs.50,000 each in the stocks of Alpha and Beta. The variance of stocks of
Alpha and Beta are 18(%)2 and 30(%)2 per annum respectively. The correlation of returns from
the two stocks is 0.40.
You are required to
a. Find out the variance of the portfolio.
b. Find out the benefit of diversification.
c. Find out the benefit of diversification if the correlation of return between the two stocks is –
1.
d. Calculate the Value at Risk (VaR) of the portfolio for the correlation of 0.40 at 95%
confidence level.
(Assume 250 trading days in a year)
3. An investor has purchased 300 shares of ACC at a price of Rs.160 per share. To hedge against
any fall in the stock value the investor also purchased put option on 300 shares with strike price
of Rs.160. The premium is Rs.5 for each share. The delta of put option on ACC’s stock is 0.30,
and the standard deviation of the price of ACC stock is 25% p.a.
You are required to calculate 30-day VaR at 90% confidence level for
i. The long position in the stock
ii. The long position in the put
The combined position of long stock and long put.
4. Consider a position consisting of $200,000 investment in gold and $300,000 investment in silver.
The annual volatilities of gold and silver are 20% and 15% respectively. The coefficient of
correlation between their returns is 0.65.
You are required to calculate the 10-day 97.5% value at risk for the portfolio. By how much does
diversification reduce the VaR?
(Assume 250 trading days in a year)

5. An investor has short sold 100 shares of ICICI Bank at a price of Rs.250 per share. To hedge
against any rise in the stock value the investor also purchased call option on 100 shares with
strike price of Rs.240. The premium is Rs.12 for each share. The delta of call option on ICICI’s
stock is 0.70, and the standard deviation of the price of ICICI stock is 18% p.a.
You are required to calculate 15-day VaR at 95% confidence level for
i. The short position in the stock
ii. The long position in the call
iii. The combined positions of short stock and long call.
6. Mr. Ashish has invested in 200 stocks of Cadila at Rs.240 each and 300 stocks of JISCO at Rs.360
each. The standard deviation of stocks of Cadila and JISCO are 9% and 12% per annum
respectively. The correlation of returns from the two stocks is 0.56.
You are required to
a. Find out the standard deviation of the portfolio.
b. Find out the benefit of diversification.
c. Find out the benefit of diversification if the correlation of return between the two stocks is –
1.
d. Calculate the Value at Risk (VaR) of the portfolio for the correlation of 0.56 at 95%
confidence level. (Assume 250 trading days in a year)
7. White Ltd. and Black Ltd. both wish to borrow $100 million for five years and have been offered
the following rates:
Firm Lending term available Maturity
Fixed interest Floating interest
White Ltd. 5% 6m LIBOR + 0.25% 5 years
Black Ltd. 4% 6m LIBOR + 0.75% 5 years
White Ltd. requires a fixed rate loan while Black Ltd. requires a floating rate loan.
You are required to
a. Design a swap that will net a bank, acting as an intermediary 0.20 percent per annum and
that will appear equally attractive to both companies.
b. Explain the risks various parties face in this swap.
8. The concept of VAR can be understood in a better manner with help of following example.
Suppose you hold Rs. 2 core shares of X Ltd. Whose market price standard deviation is 2% per
day. Assuming 252 trading days a year, determine maximum loss level over the period of 1
trading day and 10 trading days with 99% confidence level.
9. Consider a portfolio consisting of a Rs. 200,00,000 investment in share XYZ and a Rs. 200,00,000
investment in share ABC. The daily standard of deviation of both shares is 1% and that the
coefficient of correlation between them is 0.3. You are required to determine the 10 day 99%
value at risk for the portfolio?
10. Neel holds ` 1 crore shares of XY Ltd. whose market price standard deviation is 2% per day.
Assuming 252 trading days in a year, determine maximum loss level over the period of 1
trading day and 10 trading days with 99% confidence level. Assuming share prices are normally
for level of 99%, the equivalent Z score from Normal table of Cumulative Area shall be 2.33.

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SFM EXAM CAPSULE

PLEASE REMEMBER THAT TOPICS LIKE "RISK MANAGEMENT,SECURITIZATION,

SANJAY SARAF SIR

1. The following information is available in respect of Security X

You are required to calculate:

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(i) What is the beta of Security X?

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(i) What is the beta of Security X?

Compute the following:

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13. A has portfolio having following features:

No data for stand-alone SD and Coefficient of Correlation of Split AC is not available.

15. Following is the data regarding six securities:

16. The following are the data on five mutual funds:

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4. NoBank offers a variety of services to both individuals as well as corporate customers.

Cap & Floor

You are required to compute payoff for each quarter.

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You are required to compute payoff for each quarter.

Mergers and Acquisition

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Balance Sheet of C plc

You are required to compute:

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You are required to:

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Summarised cash flow data for XY Ltd. is as follows:

* Allocated HO Overheads reflect actual cash flows.

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XY Ltd.’s Balance Sheet as at 31.3.2006 is summarised below:

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You are required to calculate:

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You are required to calculate:

7. Calculate the value of share from the following information:

8. The following is the Yield structure of AAA rated debenture:

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Total No. of Units 6,00,000

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Number of Units (` 10 face value each): 100000

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Indian Capital Market

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5. The following market data is available:

Forward Rate Agreement (FRA) for Yen is Nil.

6. Given below is the Balance Sheet of S Ltd. as on 31.3.2008:

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(iv) Effective Income-tax rate is 30%.

10. A Mutual Fund is holding the following assets in ` Crores :

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