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Hba2303:Financial Accounting Question Paper
Hba2303:Financial Accounting
Course:Bachelor Of Commerce
Institution: Meru University Of Science And Technology question papers
Exam Year:2013
QUESTION ONE – 30 MARKS
(a) Discuss the reasons why companies pay a lot of attention to financial risk management. (8 marks)
(b) With the use relevant examples discuss FOUR factors that influence the exchange rate. (8 marks)
(c) In relation to term structure of interest rates discuss the meaning of the following terms. i. Interest rate parity ii. Purchasing power parity iii. Fishers effect (6 marks) (d) Discuss four factors that affect the value of a call option. (4 marks)
(e) Discuss the differences between futures and forward contracts as used in risk management. (4 marks) QUESTION TWO –20 MARKS
(a) Discuss the taxonomy of risk. (5 marks)
(b) Four assets have the following distribution of returns.
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Probability Rate of return (%) Occurrence A B C D 0.1 10.0% 6.0% 14.0% 2.0% 0.2 10.0 8.0 12.0 6.0 0.4 10.0 10.0 10.0 9.0 0.2 10.0 12.0 8.0 15.0 0.1 10.0 14.0 6.0 20.0 REQUIRED: a) Compute the covariance of asset. i. A and B ii. B and C iii. B and D b) Computer the correlation coefficient of the combination of assets in b above. (15 marks) QUESTION THREE – 20MARKS (a) Tom M Mindia an investment specialist has been entrusted with Sh. million by a unit trust and instructed to invest the money optimally over a two-year period. The four projects are not divisible and cannot be postponed. The unit requires a return of 24% over the two years. The following are details of the investment in the projects and the money market. Initial cost Return for 2 years Expected standard deviation % %
Project 1 (PI) 6000 22 7 Project 2 (P2) 4000 26 9 Project 3 (P3) 6000 28 15 Project 4 (P4) 6000 34 13
The correlation coefficients of returns over the two-years are as follows:
P1 and P2 = 0.70, P1 and P3 = 0.62, P1 and P4 = 0.56, P2 and P4 = 0.57,P3 and P4 = 0.76
Over the two-year period, the risk free rate is estimated to be 16%, the market portfolio return, 27% and the variance of the return on the market, 100%
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Required: By analyzing the two-asset portfolios, evaluate how Tom MMindia should invest the Sh.10 million. (20 Marks) QUESTION FOUR – 20MARKS (a) Discuss the practical use of the binomial option pricing model. (8Marsk)
(b) XYZ Ltd, a UK firm has bought goods from a US supplier and must pay US$ 4 million in 3 months time. The company finance director wishes to hedge against the foreign exchange risk and is considering 3 methods:
i. Using the forward exchange contract ii. Using the money market hedge iii. Using a lead payments Annual interest rate and foreign exchange rate are given below: US$ UK£ Deposit Rate Borrowing Rate Deposit Rat e Borrowing Rate 1 month 7% 10.25% 10.75% 14.0% 3 months 7% 10.75% 4.0% 4.25% Spot rate £1:$ 1.8625 1.8635 1 month forward 0.60 0.58 cents premium 3 months forward 1.80 1.75 cents premium Required Advise the company on the best method to use. (12 Marks) QUESTION FIVE – 20MARKS (a) Discuss any five methods of traditional currency management. (10 Marks)
(b) Discuss the main assumptions of the Black and Scholes model of option valuation. (10 Marks)
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