The Financial System (25556) – Spring 2024
Final Exam Practice Questions & Solutions
Question 1
Jane wants to contribute a once-off amount to her superannuation fund. Assume returns are 6% p.a. compounding monthly. Calculate the accumulated sum of a single payment of:
a) $1,000 invested 45 years prior to retirement.
b) $1,000 invested 10 years before retirement.
Question 2
A funds management style that aims to replicate the performance of a particular market index is:
A. active investment management
B. passive investment management
C. technical analysis
D. fundamental analysis
E. contrarian investment
Question 3
A technique to predict future asset price movements based on identifying price patterns is:
A. active management
B. passive management
C. technical analysis
D. fundamental analysis
E. None of the above
Question 4
Hedge funds:
A. do not use financial leverage
B. hedge risk exposures to minimise the risks to investors
C. are also referred to as ‘mutual funds’
D. aggressively pursue high returns
E. only charge performance-based fees
Question 5
The activities of superannuation schemes include:
A. the collection of regular payments by employers on behalf of their employees
B. the investment of funds over various asset classes
C. the release of funds to the employee at retirement
D. earning fees for the services they provide
E. All of these
Question 6
Fund managers:
A. bear all the investment risk posed by the variability of returns on investments
B. earn net interest revenue in return for their services
C. collect retail investor’s funds and arrange the investment of pooled funds
D. invest pooled funds only in shares
E. All of these
Question 7
Woolworths Ltd shares are trading at $37.53. The company has 1.25 billion ordinary shares issued and annual earnings available to ordinary shareholders of $2.35 billion. What is the current Woolworths P/E ratio?
Question 8
Calculate the estimated share price for the following companies, assuming a required return of 12% p.a.
(a) Red’s dividends have been $1.70 per share for some time. It does not reinvest any of its earnings and therefore is not expected to grow in the foreseeable future.
(b) White’s most recent dividend was $1.70 per share and dividends are expected to continue to grow at 4% indefinitely.
Question 9
Complete the following table:
Company Price EPS P/E ratio Projected EPS Projected price
ANZ 33.49 2.39 2.00
CBA 81.59 4.99 5.15
NAB 34.63 2.42 2.30
WBC 34.42 2.26 2.50
Question 10
A listed company:
A. can generally raise as much new equity as it wishes through a private placement
B. can expect its share price to rise if it conducts a rights issue
C. will successfully conduct a rights issue if the subscription price is set above the current share price
D. can rapidly increase its equity capital through dividend reinvestment schemes
E. None of these are correct
Question 11
The marketing process of a large IPO would not normally include:
A. pre-marketing to prepare investors for the issue
B. the commissioning of independent and unbiased analyst’s reports
C. a road show
D. a bookbuild
E. the pricing and allocation of shares to investors
Question 12
In Gordon’s dividend discount model (DDM), the estimated share value is:
A. positively related to the current annual dividend
B. positively related to the required return on the share
C. negatively related to the dividend growth rate
D. positively related to the share’s beta
E. None of these
Question 13
Venture capital is best defined as:
A. debt capital supplied to new emerging businesses
B. equity capital supplied to established businesses
C. debt capital supplied to established businesses
D. equity capital supplied to new listed businesses
E. equity capital supplied to new emerging businesses
Question 14
One difference between ordinary and preference shares is that:
A. preference dividends are payable only after ordinary dividends have been paid
B. preference dividends are tax deductible
C. preference dividends are a fixed amount
D. ordinary shares are less risky
E. preference shares have greater potential for capital gains
Question 15
According to the capital asset pricing model (CAPM), which of the following is not relevant to the required return for a firm’s equity?
A. The standard deviation of returns for the firm’s equity
B. The risk-free rate
C. The market return on a diversified equity portfolio
D. The beta of the share
E. All of these are relevant
Question 16
Consider the following market depth information for Company X. How much would you pay to buy 5,000 shares at-market?
|
Bid
|
Offer
|
|
Number
|
Quantity
|
Price
|
Price
|
Quantity
|
Number
|
|
4
|
5,400
|
5.730
|
5.770
|
1,200
|
1
|
|
2
|
2,360
|
5.720
|
5.780
|
6,750
|
1
|
|
1
|
900
|
5.710
|
5.790
|
1,445
|
2
|
Question 17
The automated trading system used by the ASX:
A. can be accessed by individual retail investors
B. ranks unmatched orders in terms of time
C. matches the highest priced buy orders and the lowest priced sell orders first
D. is called SEATS
Question 18
The functions of the share market do not include:
A. performing price discovery by revealing the value of shares
B. endowing listed securities with liquidity
C. setting the price for IPOs
D. disciplining the behaviour of a company’s top management
E. developing a pool of investors
Question 19
To conduct a secondary market for shares, the ASX:
A. sets the rules for the admission of companies to the market
B. establishes trading and settlement arrangements
C. discloses trading information, such as individual share prices
D. promotes itself as a market for securities
E. All of these
Question 20
Basis risk can be defined as:
A. the chance that a hedge instrument will not precisely manage a risk exposure
B. the chance of a futures position resulting in a loss
C. the chance of the physical market transaction resulting in a loss
D. the risk a hedged investment earns more than expected
E. the risk a hedged debt costs less than expected
Question 21
A speculator in futures contracts:
A. will always have an exposure elsewhere to the contract item
B. takes a futures position that has an opposite profit and loss potential to that of their physical market exposure
C. seeks to exploit occasions when prices in the spot and futures markets are misaligned
D. is seeking to profit from futures markets price changes
E. takes a position simultaneously in both the physical and futures markets to profit from price differences
Question 22
Susan placed an at-market order to buy a quantity of futures contracts. The counterparty in her resulting futures contract is:
A. another trader
B. a bank
C. her broker
D. the clearinghouse
E. the ASX
Question 23
Through the processes of novation and margin payments, the clearinghouse:
A. becomes counterparty to each futures transaction
B. seeks to protect traders from default risk
C. will close out the position of defaulting traders
D. guarantees the performance of futures contracts
E. All of these are correct
Question 24
An advantage of futures contracts over FRAs is that:
A. futures contracts are not standardised
B. futures contracts have a secondary market
C. futures contracts have a lower up-front cost
D. futures contracts are always deliverable
E. futures contracts are more likely to provide a perfect hedge
Question 25
Calculate the profit or loss achieved by a speculative investment in 10 March BAB futures contracts given the position was opened by buying the contracts at a price of 96.7 and later closed-out at a price of 96.9.
Question 26
A trader pays an option premium of $0.50 to purchase a European call option on XYZ shares with a strike price of $8 per share. What will be the share price at the maturity date for the trader to break even from their position?
Question 27
To close out an unprofitable position on a short put, an option trader would:
A. buy puts with the same expiry date and exercise price
B. sell puts with the same expiry date and exercise price
C. buy calls with the same expiry date and exercise price
D. sell calls with the same expiry date and exercise price
E. Short option positions must be maintained until expiry
Question 28
The value of call options, all else being equal, is less when which of the following is larger:
A. share price
B. exercise price
C. volatility of the underlying asset
D. time to expiry
Question 29
Which of the following is not one of the fundamental factors that determine an option’s value?
A. The option’s exercise price
B. The expected rate of return on the underlying share
C. The share price
D. The option’s time to expiry
E. The expected volatility in the share price
Question 30
The seller of a call option:
A. has unlimited profit potential
B. has a potential for profit that is limited to the option premium
C. rarely makes a profit
D. has positive intrinsic value when the S < X.
Question 31
The profit or loss for the holder of a $5 call option (purchased for $0.50) given the share price at expiry is $5.20, will be:
A. zero, because they will not exercise
B. a loss of $0.50, because they will not exercise
C. a loss of $0.30, because they will exercise
D. a profit of $0.20, because they will exercise
Question 32
An exchange-traded option contract is:
A. a method by which companies can raise additional equity financing
B. a perpetual contract, like a share
C. the right, but not the obligation, to settle the contract
D. a derivative contract that can be acquired for free
E. a derivative contract that is traded OTC
Question 33
Which of the following investors would be happy to see the share price rise sharply?
A. An investor who owns a call option.
B. An investor who owns a put option.
C. An investor who has sold a call option.
D. An investor who owns the share and has sold a call option.
Question 34
A call option is said to be in-the-money when:
A. the price of the share is greater than the exercise price
B. the price of the share is less than the exercise price
C. the price of the share is the same as the exercise price
D. when the option position is profitable
Question 35
The profit or loss on a long call at expiry is equal to: A. (maximum of (X – S) or zero) + option premium B. (maximum of (X – S) or zero) – option premium C. (maximum of (S – X) or zero) – option premium D. (maximum of (S – X) or zero) + option premium E. Cannot be negative
Question 36
Given the quote USD/JPY102.51, calculate (i) the amount of JPY that can be purchased with USD 100,000, and (ii) the amount of USD that can be purchased with JPY 1,000,000.
Question 37
Suppose the spot exchange rate is AUD/SGD0.9820, and that interest rates in Australia are 5% p.a. while those in Singapore are 3% per annum.
A. Calculate the 180-day forward rate. (Note that Singapore uses a 365-day financial year)
B. What is the size of the forward premium or forward discount?
Question 38
The following factors may have an influence on the value of a currency. For which of these is the relative inflation rate of central importance?
A. Purchasing-power parity
B. Interest-rate parity
C. Terms of trade
D. Current account balance
E. Speculation
Question 39
A forward contract in foreign currencies is an agreement to exchange:
A. currencies in the future, at an unspecified date, at an exchange rate agreed when the contract is traded
B. currencies in the future, at a specified date, at whatever the spot rate is at that future date
C. currencies in the future, at an unspecified date, at an unknown exchange rate
D. a product for foreign currency, in the future, at a specified date
E. currencies in the future, at a specified date, at an exchange rate agreed when the contract is traded.
Question 40
A dealer quotes AUD/EUR0.6325-0.45.
A. The dealer will buy AUD at 0.6325 and sell AUD at 0.6345 B. The dealer will buy EUR at 0.6325 and sell EUR at 0.6345 C. The dealer will buy AUD at 0.6325 and sell EUR at 0.6345 D. The dealer will sell AUD at 0.6325 and buy EUR at 0.6345