(Papers) ACET Paper June 2015 "ST5 – Finance and Investment A"
(Papers) ACET Paper June 2015 "ST5 – Finance and Investment A"
Q.1
a) Why may governments consider it necessary to regulate company mergers? (3)
b) What is meant by the term conglomerate merger? (1)
c) Explain why two different companies might undertake a conglomerate merger.
(6)
Q.2
a) Describe briefly the main forms of private equity. (2) (2)
b) A pharmaceutical company with significant R&D (research and development) has
approached a venture capital firm for finance. Explain why venture capital may
be an appropriate means of finance for this company. (4)
Q.3
a) Describe briefly the three types of credit derivatives. (5) (5)
b) Give examples of situations when each of these could be appropriate means for
managing credit risk. (3)
Q.4 A call with a strike price of Rs. 60 costs Rs. 6. A put with the same strike price and expiration date costs Rs. 4. Construct a table that shows the profit from a straddle. For what range of stock prices would the straddle lead to a loss? (5)
Q.5
a) Explain what is meant by “interest rate cap”. (2)
b) Consider a contract for a principal of Rs. 10 mn with a cap rate of 4% p.a.
(with quarterly compounding) for three months starting in one year. The forward
interest rate for a three-month period starting in one year is 3.75% p.a. (with
quarterly compounding). The current 15-month interest rate is 3.25% p.a. (with
continuous compounding). The volatility for the forward three month rate
underlying the caplet is 20% p.a. Calculate the caplet price. (7)
Q.6
a) A life insurance company writes predominantly unit linked products. Some of these products offer investment guarantees. The Investment Committee of the company is meeting to review the investment policy. One of the members has suggested the following investment restrictions:
i) No investments in companies involved in manufacturing or distribution of tobacco products or alcoholic beverages.
ii) Avoid frequent churning of stocks in its equity portfolio.
iii) Restrictions in holding of derivatives.
Explain the merits and demerits of these restrictions.