Which one of the following bonds is trading at a discount?

A project has the following cash flows:

Project Cash Flows | |

Time (yrs) | Cash flow ($) |

0 | -400 |

1 | 0 |

2 | 500 |

What is the payback period of the project in years?

Normally cash flows are assumed to happen at the given time. But here, assume that the cash flows are received smoothly over the year. So the $500 at time 2 is actually earned smoothly from t=1 to t=2.

**Question 271** CAPM, option, risk, systematic risk, systematic and idiosyncratic risk

All things remaining equal, according to the capital asset pricing model, if the systematic variance of an asset increases, its required return will increase and its price will decrease.

If the idiosyncratic variance of an asset increases, its price will be unchanged.

What is the relationship between the price of a call or put **option** and the total, systematic and idiosyncratic variance of the **underlying asset** that the option is based on? Select the most correct answer.

Call and put option prices **in**crease when the:

Which of the following statements about the weighted average cost of capital (WACC) is **NOT** correct?

The covariance and correlation of two stocks X and Y's annual returns are calculated over a number of years. The units of the returns are in percent per annum ##(\% pa)##.

What are the units of the covariance ##(\sigma_{X,Y})## and correlation ##(\rho_{X,Y})## of returns respectively?

**Hint**: Visit Wikipedia to understand the difference between percentage points ##(\text{pp})## and percent ##(\%)##.

A trader **buys** one December futures contract on orange juice. Each contract is for the delivery of **10,000** pounds. The current futures price is $**1.20** per pound. The initial margin is $**5,000** per contract, and the maintenance margin is $**4,000** per contract.

What is the smallest price change would that would lead to a margin call for the buyer?

A pig farmer in the US is worried about the price of hogs falling and wants to lock in a price now. In one year the pig farmer intends to sell **1,000,000** pounds of hogs. Luckily, one year CME lean hog futures expire on the exact day that he wishes to sell his pigs. The futures have a notional principal of **40,000** pounds (about 18 metric tons) and currently trade at a price of **63.85** cents per pound. The underlying lean hogs spot price is **77.15** cents per pound. The correlation between the futures price and the underlying hogs price is **one** and the standard deviations are both **4** cents per pound. The initial margin is USD**1,500** and the maintenance margin is USD**1,200** per futures contract.

Which of the below statements is **NOT** correct?

**Question 825** future, hedging, tailing the hedge, speculation, no explanation

An equity index fund manager controls a USD**500** million diversified equity portfolio with a beta of **0.9**. The equity manager expects a significant rally in equity prices next year. The market does not think that this will happen. If the fund manager wishes to increase his portfolio beta to **1.5**, how many S&P500 futures should he buy?

The US market equity index is the S&P500. One year CME futures on the S&P500 currently trade at **2,155** points and the spot price is **2,180** points. Each point is worth $**250**.

The number of one year S&P500 futures contracts that the fund manager should buy is:

**Question 981** margin loan, Basel accord, credit conversion factor

Margin loans secured by listed stock have a Basel III risk weight of **20**%.

For margin loans that cannot be immediately cancelled by banks and asked to be repaid, the credit conversion factor (CCF) is **20%**.

Suppose you have a stock portfolio worth $500,000, financed by:

- $
**300,000**of your own money; and - $
**200,000**of the bank’s funds in the form of a margin loan which can only be cancelled by the bank after 5 days notice. The margin loan’s maximum LVR is**70**%.

How much regulatory capital must the bank hold due to your margin loan? Assume that the bank wishes to pay dividends to its shareholders, so include the 2.5% capital conservation buffer in your calculations.