Page 8 of 10 FirstFirst ... 678910 LastLast
Results 71 to 80 of 97

Thread: Free CFA Level 2 practice question bank for June 2011 exam

  1. #71
    Active Member
    Join Date
    Apr 2011
    Posts
    29
    Rep Power
    9
    The answer for Q 28 is B or the Pac man defense strategy.

  2. #72
    Moderator
    Join Date
    Feb 2011
    Posts
    96
    Rep Power
    20
    Q28 Ans B:
    This takeover defense strategy is known as Pac man defense.



    ================================================== =====================================
    Today's Question (Questions and answers provided by Knowledge Varsity)

    Case Study

    Swamp Telecom, a subsidiary of Dakshin Bharat RealEstate is involved in providing telecommunication services. The firm has agreed to take a floating rate loan of $100 million after 6 months, the maturity of the loan would be of 6 months. Mohnish Upadhaya is the finance manager of the firm and he is concerned that the interest rates will rise in the future, so he takes a position in a Forward Rate Agreement which expires in 6 month (180 days) and is based on 180 days LIBOR.

    The current LIBOR term structure (spot rates) is given below

    Term-----------Interest Rate
    180 days---------------6%
    360 days-------------- 7%

    After 30 days of taking the position in the FRA, the interest rates have changed, below exhibit shows the interest rate.

    Term-----------Interest Rate
    150 days---------------6.5%
    330 days---------------7.8%

    Q29. Determine the rate that would be determined for the FRA and the nomenclature for the FRA?

    Options----------------Rate-------------------Nomenclature
    A----------------------------6%-----------------------------6 X 12 FRA
    B---------------------------7.767%-------------------------6 X 12 FRA
    C---------------------------7.855%-------------------------6 X 6 FRA

    ================================================== =====================================

  3. #73
    Active Member
    Join Date
    Apr 2011
    Posts
    29
    Rep Power
    9
    The answer to the Q 29. is B according to my calculations.

  4. #74
    Administrator
    Join Date
    Sep 2012
    Posts
    150
    Rep Power
    20
    Q29 Ans B:

    Since the spot rates are given, we need to find the no-arbitrage forward rate. This forward rate would be the rate of FRA. For LIBOR based rates, we will use 30 days for a month and 360 days for a year, also since LIBOR is add-on yield we need to consider the simple interest during the calculations.

    (1 + rate for 180 days) * (1 + forward rate for another 180 days) = (1 + rate for 360 days)
    (1 + 0.06 * 180/360) * (1 + F * 180/360) = (1 = 0.07 * 360/360)
    = 7.76699% or 7.767%

    The nomenclature for the FRA comes from the no of days to expiry and the LIBOR Rate
    FRA would be termed as 6 (months to expiry) X 12 (months to expiry + the month of LIBOR)


    ================================================== =====================================
    Today's Question (Questions and answers provided by Knowledge Varsity)

    Q30. The value of the FRA to Swamp telecom after 30 days of entering the contract is closest to? The FRA rate, when the contract was entered is 7.767%.

    A. $1.07 mn
    B. $2 mn
    C. $1 mn

    ================================================== =====================================

  5. #75
    Active Member
    Join Date
    Apr 2011
    Posts
    29
    Rep Power
    9
    I am not so sure about the choices for this Q 29. I am using my calculations and getting an answer of $429371.97.

    Please provide explanation with clarification.

  6. #76
    Moderator
    Join Date
    Feb 2011
    Posts
    96
    Rep Power
    20
    Ans 30 C:

    Since the interest rates have changed (increased) the FRA would become more valuable to Swamp now. The best way to find out the value of the FRA is to determine the New FRA rate and from this we should be able to calculate the benefit it provides to Swamp. The method given in Institute book is somewhat cumbersome.
    New FRA Rate:
    (1 + rate for 150 days) * (1 + forward rate for another 180 days) = (1 + rate for 330 days)
    => (1+0.065*150/360) * (1 + Fnew * 180/360) = (1+0.078*360/360)
    => Fnew = 9.91481%

    Now calculate the benefit due to the rate increase.
    Benefit = (Fnew – F) * 180/360 * Notional Value = 2.14782% * 180/360 * $100 Mn
    => Benefit = $1,073,908

    Please note that this benefit will be realized 330 days from now, so we need to discount this to the present.
    PV of benefit = Benefit/ (1 + 330 day rate * 330/360) => $1,073,908/( 1 + 0.078*330/360)
    => PV of benefit = $1,002,247

    Approximately we can say that the value of FRA is $1 mn to Swamp

    ================================================== =====================================
    Today's Question (Questions and answers provided by Knowledge Varsity)

    Case Study (Derivatives)

    Omar Sheikh is a derivative analyst with Akbardeen advisors. He is advising a corporate client, Maanza Inc about the issuance of a Swap. Manza has a floating rate receivable for 2 years in which the payment are done every 6 month. Manza officials are concerned that the rate might decrease and hence they want to enter into the swap as a fixed rate receiver.

    Below exhibit has the information on the LIBOR rates.

    Period-----------Annual rate
    180 days-------------4.5%
    360 days--------------5%
    540 days-------------5.5%
    720 days--------------6%

    Omar has gone through the current LIBOR rate and the expectation of Manza and advises them to enter into the swap as fixed rate receiver and pay LIBOR. The notional value of the swap is $100 million.

    After 270 days have passed, Manza officials believe that due to international scenario, the floating rate will increase. Manza officials believe that the best way is to terminate the swap contract. Following are the current LIBOR rates

    Period------------Annual rate
    90 days------------------6%
    270 days----------------7%
    450 days---------------7.5%

    Q31. Which of the following is closest to the fixed rate that Omar would suggest to Manza?

    A. 1.5%
    B. 5.5%
    C. 5.72%

    ================================================== =====================================

  7. #77
    Mentor, Knowledge Varsity ratankv's Avatar
    Join Date
    Jan 2010
    Posts
    42
    Rep Power
    10
    Hi Ashish,

    Could you please let me know your approach.

    Thanks
    Ratan,
    Learning Officer,
    Knowledge Varsity

    Quote Originally Posted by ashish24 View Post
    I am not so sure about the choices for this Q 29. I am using my calculations and getting an answer of $429371.97.

    Please provide explanation with clarification.

  8. #78
    Active Member
    Join Date
    Apr 2011
    Posts
    29
    Rep Power
    9
    As part of my calculations I did 1+ 0.078* 330/360, as 0.078 is the 330 day rate. However you have multiplied 0.078 by 360/360, which I guess caused the difference in our answers.

  9. #79
    Moderator
    Join Date
    Feb 2011
    Posts
    96
    Rep Power
    20
    Q 31 Ans C:

    We will arrive at the present value factors for the rates in the exhibit 1.

    PV for 180 days = Z1 = $1/ (1 + 4.5% * 180/360) = 0.9780

    Similarly, we will arrive at the other factor
    Z2 = 0.9524
    Z3 = 0.9238
    Z4 = 0.8929

    Fixed rate = (1 – Z4) / (Z1 + Z2 + Z3+ Z4)
    => (0.1071)/(3.747) = 2.86%
    Or the annual rate will be 2.86 * 2 = 5.72%


    ================================================== =====================================
    Today's Question (Questions and answers provided by Knowledge Varsity)

    Q32. Which of the following is closest to the fixed rate at which Manza officials will be able to enter into an offsetting swap as a fixed rate payer?

    A. 5.72%
    B. 6.5%
    C. 6.02%

    ================================================== =====================================

  10. #80
    Senior Member
    Join Date
    Aug 2009
    Posts
    192
    Rep Power
    11
    Ans 32: C

Similar Threads

  1. Free CFA Level 1 Practice Questions for December 2012 exam
    By ratankv in forum CFA exam conducted by CFA Institute, USA
    Replies: 75
    Last Post: 30-11-2012, 02:54 PM
  2. Free CFA Level 1 practice question bank for June 2011 exam
    By Daulat Guru in forum CFA exam conducted by CFA Institute, USA
    Replies: 180
    Last Post: 01-03-2012, 10:31 PM

Tags for this Thread

Bookmarks

Posting Permissions

  • You may not post new threads
  • You may not post replies
  • You may not post attachments
  • You may not edit your posts
  •