Answer ALL Questions

Question 1

Imagine you are attending the assessment centre with HSBC Investment Banking Division. Complete the below tasks selected from the case study session of the assessment centre.

(a) Explain what means by technical trading (analysis) and fundamental trading (analysis) respectively. And discuss the implications of the “Efficient Market Hypothesis” on these two analyses. [7 marks]

(b) You are required to complete the below questions using the data provided in  the Appendix (Table1: Data for Question 1) at the end of the question paper. Provide the Excel workings in your answer.

(i)       Calculate the average weekly returns for “Apple” share and “S&P 500” respectively. [2 marks]

(ii)       Estimate the beta of the “Apple” share. [4 marks]

(iii)      Calculate the Sharpe ratio, Treynor ratio and Calmer  ratio  for  “Apple” respectively and make brief comments on the ratios you calculated. If the parameters cannot be calculated with the data provided, find them on reliable resource available on the internet (reference required). The assumptions and or rationales of the choice of the parameters used in calculation need to be  briefly discussed. [12 marks]

[25 marks in total]

Question 2

(a) Mehra and Prescott (1985) calculated a historical equity premium of 6.2% in the United States for the period 1889– 1978. This premium is much higher compared to that of the bond in the period.  How can we explain this phenomenon? [15 marks]

(b) The services and or products provided by FinTech companies sometimes are referred to as “Disruptive innovation”. Critically discuss the role of this disruptive innovation in improving the efficiency of resource allocation in the financial system. [10 marks]

[25 marks in total]

Question 3

(a) Assume you are trading in an order-driven market. Below is a snapshot of the limit order book of stock “ Kenchu” (size in thousand):

If following orders (limited/market orders) are entered:

(i)        Identify each order: whether the order is taking the  market or making the market. And calculate the price if order is executed. [4 marks]

(ii)       Illustrate the order book after the execution of above 4 orders and comment on the impact of those orders on the order book. [4 marks]

(b) Sanyo LP has a UK equity-based portfolio valued at £50 million on the 1st March  20X0. It has a CAPM β of 0.9.  The cash FTSE100 index is 7245 on the 1st  March 20X0. Currently, the May 20X0 FTSE 100 futures contract is priced at 7240.

(i)       Calculate the number of futures contracts required to hedge this position. [2 marks]

(ii)       Calculate the terminal value of the portfolio upon the maturity of the FTSE 100 futures in May 20X0. [5 marks]

(c) BingBing Co has borrowed a £25 million money market loan, where the interest rate is LIBOR +300 basis points. It is currently 15th  May 20X0 and LIBOR is 2.5%. The interest rate is due to be reset for the following 3 months on the 1st July 20X0 (i.e. LIBOR will be reset). The company wishes to hedge its exposure using short term interest rate futures contracts (STIRS). Assume the actual futures price on the 15th May 20X0 is 97. Calculate and discuss the outcome of the hedge if basis is 0.2 and LIBOR is 3% on the 1st  July 20X0. The discussion should include basis risk. [10 marks]

Question 4

(a) Company A and B have been offered the following rates per annum on a $200 million 6- year loans by their banks: (SOFR: The Secured Overnight Financing Rate)

Design an interest rate swap between Company A and B that is equally beneficial for both companies. [6 marks]

(b) Dunvant Hill Co is a UK based company but with operations across the Globe. The company expects to receive US $500,000 from a foreign client and needs to pay US $ 300,000 to a foreign supplier in 3 months. Current exchange rates in the home country of Dunvant Hill are as follows:

Spot exchange rate: ($/£) 1.1934 – 1.1952

Three-month forward exchange rate: ($/£) 1.1952 – 1.2000

Using the information provided, advise Dunvant Hill Co on the best way to hedge its future transactions. [8 marks]

(c) Explain the capital provision of Lloyd’s in preparing the claims. [5 marks]

(d) The following quotes were observed for European options on FTSE 100 index on 1st March 20X0.  The current FTSE 100 index is 7243.83

7215.00           55.5       65             75.5                     35.0          45.0         59.0

Assume a pension fund has a portfolio tracking FSTE 100 valued £20 million on 1st  March 20X0. If the pension wishes to manage the risk associated with a fall of the value of the portfolio in the next 3 months, which options should this pension fund use? What is the outcome of the hedge if the FSTE 100 index is 7255 on 1st June 20X0? [6 marks]