CONFIDENTIAL 1 AC/FEB 2022/MAF653/630

UNIVERSITI TEKNOLOGI MARA

FINAL ASSESSMENT

COURSE FINANCIAL MARKETS

COURSE CODE MAF653/630
ASSESSMENT FEBRUARY 2022
TIME 3 HOURS

INSTRUCTIONS TO CANDIDATES

1. This question paper consists of five (5) questions.

2. Answer ALL questions in the Answer Booklet. Start each answer on a new page.

3. Please fill in the declaration form stated in the Answer Booklet.

4. No discussion among members.

5. Plagiarism is not allowed.

6. The answer may be type or handwritten.

7. Please check to make sure that this examination pack consists of:

i) the Question Paper

ii) a two-page Appendix 1 (Present Value Table)
iii) an Answer Booklet – provided by the Faculty

8. Answer ALL questions in English.

D O N O T TURN THIS P A G E UNTIL Y O U ARE TOLD TO D O S O

This examination paper consists of 6 printed pages
© Hak Cipta Universiti Teknologi MARA CONFIDENTIAL
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QUESTION 1

A. OMC Bhd is a manufacturer and distributor of fuels and lubricants. The firm planned to
pay a dividend of RM5 per share next year. After which, analysts forecasted that it
would grow at 7% over the next four years. Then, the annual growth rate of dividends
will be 8% for the foreseeable future.

OMC beta is 0.9. The risk-free rate of return is estimated to be 4.8%, and the market
risk premium is 8%.

Required:

i. Calculate the maximum price for OMC Bhd stock that investors would be willing
to pay.
(5 marks)

ii. Using same information, compute the intrinsic value of OMC Bhd if after the fifth
year, there was no growth in dividend.
(2 marks)

iii. However, shortly after the forecast was made, Covid-19 pandemic suddenly hit
the entire globe. The movement control order which was imposed by the
government affected not only the operating activities of the company but also its
expected earnings. As a result, the dividend is expected to be constant at RM5
per share over the next three years. Later, it would increase at a rate of 5% over
the next two years, and remains stable at 10% per annum thereafter. The
investor’s required rate of return is 15% to reflect the riskier investment.

Analyze the impact of the pandemic on OMC’s share value. (Note: Relevant
supporting calculation must be shown)
(6 marks)

B. Breezy Bhd and Freezy Bhd are both listed under beverages industry on Bursa
Malaysia. The average price earnings ratio for both companies are 12 and 15
respectively. Azrul, an individual investor is considering investing in shares of these
two companies. The following are additional information about Breezy and Freezy.

Breezy Bhd: The profit after tax is RM7 million and the number of shares traded is
2,000,000 units. The market price of the share is RM52.

Freezy Bhd: The profit after tax is RM5 million and the number of shares traded is
1,000,000 units. The market price of the share is RM68.

Required:

i. Advise Azrul on which of the two companies he should invest in. (Note: Relevant
supporting calculation must be shown)
(6 marks)

ii. Explain two (2) factors affecting share price of a company.

(4 marks)
(Total: 23 marks)
© Hak Cipta Universiti Teknologi MARA CONFIDENTIAL
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QUESTION 2

A. Today is 31 December 2021. Adam & Co. has invested in RM1,000 par value
convertible bonds from Platinum Bhd 4 years ago. The bond which will mature on 31
December 2026 pays 8% coupon semi-annually. However, it is stipulated in the
agreement clause that the bond is callable at any time before the period of maturity
ends. The prevailing market interest rate of similar bond is 2% above the coupon rate.

Required:

i. Calculate the value of Platinum Bhd bond if it is held until maturity.

(3 marks)

ii. Explain whether Platinum Bhd should call the bond at the end of 2022 with three
years call penalty on interest if the conversion value of the bond is estimated to
be 10% higher than the value of straight bond in (a) above.
(4 marks)

iii. Advise Platinum Bhd on the appropriate condition to make a callable bond.
(4 marks)

iv. Explain the risks faced by Adam & Co. in association with investment in callable
bond.
(3 marks)

B. Mr. Yosef wishes to buy a bond which bearing no interest for his child’s education
savings. Mr. Yosef is expecting a yield of 5% rate of return per year from the savings.
Bank Negara Malaysia, on behalf of the government is planning to issue GII, a zero-
coupon bond at a discounted price to the face value of the bond. The par value of the
bond is RM1,000 per unit. On maturity date in the year 2025, the zero-coupon bond
will be redeemed at par value.

Required:

i. Determine the maximum price of the GII bond that will mature in 2025 that Mr.
Yosef is willing to pay. Assume today is December 2022.
(3 marks)

ii. If Mr. Yosef invest in GII zero-coupon bonds, estimate the amount of capital gain
earned when the bonds matured.
(2 marks)

iii. Distinguish between “Deep Discount Bond” and “Zero Coupon Bond”.
(4 marks)
(Total: 23 marks)

© Hak Cipta Universiti Teknologi MARA CONFIDENTIAL

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QUESTION 3

A. MCO implementation has had a significant impact on the production of crude palm oil
(CPO) due to tight standard operating procedures (SOPs) and a lower workforce. The
palm oil supply is expected to remain tight until the 1 s t quarter of 2022 as there is slow
production due to the MCO restriction.

Today is 15 January. Simplistic Bhd forecasted that they need 425 metric tons of CPO
in March. It is to ensure that there will be no disruption to the production of their
cosmetics line so that their contract to supply cosmetics products to the distributors will
not be interrupted.

Based on current news of the limited supply of crude palm oil, Mr. Jorgen, Chief
Executive Officer (CEO) of Simplistic Bhd, anticipates that the price of CPO will
increase between now and March 2022. The current market price of CPO is RM3,500
per metric tonne. However, due to a tight budget, the purchase could not be made
immediately.

Mr. Jorgen proposed that the management use CPO futures to hedge against the CPO
price increase. The March FCPO in the futures market is trading at RM3,580. Assume
that the basis is equal to zero in March 2022.

Required:

i. Explain the risk that Simplistic Bhd is exposed to and how it affects its profit.
Comment how the measure proposed by the CEO can mitigate the risk. No
calculation is required.
(4 marks)

ii. Evaluate the outcome of the hedging strategy proposed by Mr. Jorgen if the CPO
price in March rises by 12%.
(Up to 5 marks are allocated for the calculation)
(7 marks)

iii. Based on the case above, assess whether the hedging by Simplistic is perfect or
imperfect and give two reasons for the perfect or imperfect hedging.
(6 marks)

B. In June 2021, Mr Park, a portfolio manager manages a RM15 million portfolio that
closely track the movement of the FBM KLCI. He is extremely bearish on the stock
market in the coming month due to the looming uncertainties in the market. Mr Park
would like to completely reduce his exposure in the stock market by hedging using
index futures (FKLI).

The current FBM KLCI is at 1,600 points and the FKLI for August 2021 is trading at
1,610.

© Hak Cipta Universiti Teknologi MARA CONFIDENTIAL

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Required:

Advise on the appropriate action that Mr Park should take. Show him the outcome of
the strategy if after one month, the stock market falls and the FBM KLCI stands at
1,480 whereas the August FKLI at 1,483.
(Up to 5 marks is allocated for the calculation)
(7 marks)
(Total: 24 marks)

QUESTION 4

A. Briefly describe how volatility affects option prices.

(3 marks)

B. Encik Amran bought 10,000 shares of Cantwo Bhd (Cantwo) at a price of RM10 per
share that are currently trading at RM11 per share. He believes that a news
announcement is going to cause the market price to fall during the week, so he
decides to buy 100 put option on Cantwo shares with a strike price of RM9. One option
is worth the equivalent of 100 shares of the underlying.

The put option is priced at 10 index points. In addition, a RM5 commission is charged
per option.

Required:

i. Calculate the overall net profit or loss if Cantwo’s share price falls to RM8 per
share.
(3.5 marks)

ii. If Encik Amran’s prediction is wrong, and Cantwo’s share price has risen to
RM12 per share, calculate the overall profit or loss.
(3.5 marks)

C. Encik Rahman is considering to buy a 6-month call option with an exercise price of
RM50 on a stock that is trading at RM52. The option costs RM4.5. The annual risk-free
rate is 5% and the annual standard deviation of the stock returns is 12%.

Formula: C = S.N(d1) – K e –rt . N(d2)

Assume: N(d1) = 0.7879 and N(d2) = 0.714

Required:

i. Using Black-Scholes Option pricing model, determine the value of the call option.
(3 marks)

ii. Advise Encik Rahman on whether he should proceed in buying the option.
(2 marks)
(Total: 15 marks)

© Hak Cipta Universiti Teknologi MARA CONFIDENTIAL

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QUESTION 5

A. Nik Berhad (NB) wishes to borrow a fixed interest long term loan. The firm feels that
the fixed rate of interest payable will facilitate a better cash planning. However,
because of its credit rating, the best rate it can obtain is 14% per annum. Its bank
offers a floating rate of BLR + 2%.

Ally Berhad (AB) has been given a good credit rating. It can borrow at 1 1 % fixed rate
or at a floating rate of BLR + 1 % . The firm however would like to borrow at the floating
rate because it believes that the interest rates are going to fall.

The BLR is currently 9%.

Required:

Construct an interest rate swap arrangement between NB and AB. Explain how the
proposed arrangement can benefit both firms.
(6 marks)

B. ABC Berhad had a fixed rate loan of RM10 million at 14%. The firm is considering an
interest rate swap with Bubble Bhd, which has a floating rate loan of the same size at
BLR + 2%. The swap arrangement will require Bubble to pay ABC 13% and ABC will
pay Bubble BLR + 1.5%. Assumed that the loan will be redeemed in one year.

Required:

i. Evaluate whether the swap arrangement mention above will benefit ABC Berhad
if the BLR for the year is 12%. (Show relevant calculation to support your
answer).
(7 marks)

ii. Explain a fixed-for-fixed swap. Calculation is NOT required.

(2 marks)
(Total: 15 marks)

END OF QUESTION PAPER

© Hak Cipta Universiti Teknologi MARA CONFIDENTIAL

©
Table A-1: Present Value of RM1 Due at the End of n Periods
o
•5' Period 4% 5% 6% 7% 8% 9% 10% 12% 14% 15% 16% 18% 20% 24% 28% O
c 1 .9615 .9524 .9434 .9346 .9259 .9174 .9091 .8929 .8772 .8696 .8621 .8475 .8333 .8065 .7813 o
3 T]
< 2 .9246 .9070 .8900 .8734 .8573 .8417 .8264 .7972 .7695 .7561 .7432 .7182 .6944 .6504 .6104
3 .8890 .8638 .8396 .8163 .7938 .7722 .7513 .7118 .6750 .6575 .6407 .6086 .5787 .5245 .4768 a
m
4 .8548 .8227 .7921 .7629 .7350 .7084 .6830 .6355 .5921 .5718 .5523 .5158 .4823 .4230 .3725 —i
ID
3
5 .8219 .7835 .7473 .7130 .6806 .6499 .6209 .5674 .5194 .4972 4761 .4371 .4019 .3411 .2910 >
-
o i
o
6 .7903 .7462 .7050 .6663 .6302 .5963 .5645 .5066 .4556 .4323 .4104 .3704 .3349 .2751 .2274
> 7 .7599 .7107 .6651 .6227 .5835 .5470 .5132 .4523 .3996 .3759 .3538 .3139 .2791 .2218 .1776
5 8 .7307 .6768 .6274 .5820 .5403 .5019 .4665 .4039 .3506 .3269 .3050 .2660 .2326 .1789 .1388
9 .7026 .6446 .5919 .5439 .5002 4604 .4241 .3606 .3075 .2843 .2630 .2255 .1938 .1443 .1084
10 .6756 .6139 .5584 .5083 .4632 .4224 .3855 .3220 .2697 .2472 .2267 .1911 .1615 .1164 .0847 >
TJ
m
z
11 .6496 .5847 .5268 .4751 .4289 .3875 .3505 .2875 .2366 .2149 .1954 .1619 .1346 .0938 .0662 a
12 .6246 .5568 .4970 .4440 .3971 .3555 .3186 .2567 .2076 .1869 .1685 .1372 .1122 .0757 .0517 X
13 .6006 .5303 .4688 .4150 .3677 .3262 .2897 .2292 .1821 .1625 .1452 .1163 .0935 .0610 .0404 ^
14 .5775 .5051 .4423 .3878 .3405 .2992 .2633 .2046 .1597 .1413 .1252 .0985 .0779 .0492 .0316 .^
15 .5553 .4810 .4173 .3624 .3152 .2745 .2394 .1827 .1401 .1229 .1079 .0835 .0649 .0397 .0247

16 .5339 .4581 .3936 .3387 .2919 .2519 .2176 .1631 .1229 .1069 .0930 .0708 .0541 .0320 .0193
17 .5134 .4363 .3714 .3166 .2703 .2311 .1978 .1456 .1078 .0929 .0802 .0600 .0451 .0258 .0150
>
18 .4936 .4155 .3503 .2959 .2502 .2120 .1799 .1300 .0946 .0808 .0691 .0508 .0376 .0208 .0118 o
19 .4746 .3957 .3305 2765 .2317 .1945 .1635 .1161 .0829 .0703 .0596 .0431 .0313 .0168 .0092 Tl
20 .4564 .3769 .3118 2584 .2145 .1784 .1486 .1037 .0728 .0611 .0514 .0365 .0261 .0135 .0072 m
00
ro
o ro
o 21 .4388 .3589 .2942 .2415 .1987 .1637 .1351 .0926 .0638 .0531 .0443 .0309 .0217 .0109 .0056
ro

T] 22 .4220 .3418 .2775 .2257 .1839 .1502 .1228 .0826 .0560 .0462 .0382 .0262 .0181 .0088 .0044 >
D 23 .4057 .3256 .2618 .2109 .1703 .1378 .1117 .0738 .0491 .0402 .0329 .0222 .0151 .0071 .0034
m 24 .3901 .3101 .2470 .1971 .1577 .1264 .1015 .0659 .0431 .0349 .0284 .0188 .0126 .0057 .0027
> 25 .3751 .2953 .2330 .1842 .1460 .1160 .0923 .0588 .0378 .0304 .0245 .0160 .0105 .0046 .0021
©
i Table A-2: Present Value of an Annuity of RM1 per period for n Period
o
•5' Period 4% 5% 6% 7% 8% 9% 10% 12% 14% 15% 16% 18% 20% 24% 28% O
c 1 0.9615 0.9524 0.9434 0.9346 0.9259 0.9174 0.9091 0.8929 0.8772 0.8696 0.8621 0.8475 0.8333 0.8065 0.7813 |
3
< 2 1.8861 1.8594 1.8334 1.8080 1.7833 1.7591 1.7355 1.6901 1.6467 1.6257 1.6052 1.5656 1.5278 1.4568 1.3916 jjj
3 2.7751 2.7232 2.6730 2.6243 2.5771 2.5313 2.4869 2.4018 2.3216 2.2832 2.2459 2.1743 2.1065 1.9613 1.8684 m
l-K

4 3.6299 3.5460 3.4651 3.3872 3.3121 3.2397 3.1699 3.0373 2.9137 2.8550 2.7982 2.6901 2.5887 2.4043 2.2410 H
ID
5 4.4518 4.3295 4.2124 4.1002 3.9927 3.8897 3.7908 3.6048 3.4331 3.3522 3.2743 3.1272 2.9906 2.7454 2.5320 >
o
o
6 5.2421 5.0757 4.9173 4.7665 4.6229 4.4859 4.3553 4.1114 3.8887 3.7845 3.6847 3.4976 3.3255 3.0205 2.7594
> 7 6.0021 5.7864 5.5824 5.3893 5.2064 5.0330 4.8684 4.5638 4.2883 4.1604 4.0386 3.8115 3.6046 3.2423 2.9370
5 8 6.7327 6.4632 6.2098 5.9713 5.7466 5.5348 5.3349 4.9676 4.6389 4.4873 4.3436 4.0776 3.8372 3.4212 3.0758
9 7.4353 7.1078 6.8017 6.5152 6.2469 5.9952 5.7590 5.3282 4.9464 4.7716 4.6065 4.3030 4.0310 3.5655 3.1842
10 8.1109 7.7217 7.3601 7.0236 6.7101 6.4177 6.1446 5.6502 5.2161 5.0188 4.8332 4.4941 4.1925 3.6819 3.2689 >
-o
m
11 8.7605 8.3064 7.8869 7.4987 7.1390 6.8052 6.4951 5.9377 5.4527 5.2337 5.0286 4.6560 4.3271 3.7757 3.3351 |
12 9.3851 8.8633 8.3838 7.9427 7.5361 7.1607 6.8137 6.1944 5.6603 5.4206 5.1971 4.7932 4.4392 3.8514 3.3868 X
13 9.9856 9.3936 8.8527 8.3577 7.9038 7.4869 7.1034 6.4235 5.8424 5.5831 5.3423 4.9095 4.5327 3.9124 3.4272 ^
14 10.563 9.8986 9.2950 8.7455 8.2442 7.7862 7.3667 6.6282 6.0021 5.7245 5.4675 5.0081 4.6106 3.9616 3.4587 —
15 11.1184 10.38 9.7122 9.1079 8.5595 8.0607 7.6061 6.8109 6.1422 5.8474 5.5755 5.0916 4.6755 4.0013 3.4834

16 11.652 10.838 10.106 9.4466 8.8514 8.3126 7.8237 6.9740 6.2651 5.9542 5.6685 5.1624 4.7296 4.0333 3.5026
17 12.166 11.274 10.477 9.7632 9.1216 8.5436 8.0216 7.1196 6.3729 6.0472 5.7487 5.2223 4.7746 4.0591 3.5177
18 12.659 11.69 10.828 10.059 9.3719 8.7556 8.2014 7.2497 6.4674 6.1280 5.8178 5.2732 4.8122 4.0799 3.5294 £
19 13.134 12.085 11.158 10.336 9.6036 8.9501 8.3649 7.3658 6.5504 6.1982 5.8775 5.3162 4.8435 4.0967 3.5386 =n
20 13.59 12.462 11.47 10.5940 9.8181 9.1285 8.5136 7.4694 6.6231 6.2593 5.9288 5.3527 4.8696 4.1103 3.5458 S
ro
o o
ro
o 21 14.029 12.821 11.764 10.836 10.017 9.2922 8.6487 7.5620 6.6870 6.3125 5.9731 5.3837 4.8913 4.1212 3.5514 g
T] 22 14.451 13.1630 12.042 11.061 10.201 9.4424 8.7715 7.6446 6.7429 6.3587 6.0113 5.4099 4.9094 4.1300 3.5558 >
D 23 14.857 13.489 12.303 11.272 10.371 9.5802 8.8832 7.7184 6.7921 6.3988 6.0442 5.4321 4.9245 4.1371 3.5592 gj
m 24 15.2470 13.799 12.55 11.469 10.529 9.7066 8.9847 7.7843 6.8351 6.4338 6.0726 5.4509 4.9371 4.1428 3.5619 ^
> 25 15.622 14.094 12.783 11.654 10.675 9.8226 90770 7.8431 6.8729 6.3641 6.0971 5.4669 4.9476 4.1474 3.5640 8