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ACCA Paper F9 – Financial Management
Revision CourseJune 2010 Exams
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Slide 3
Health & Safety Procedures
• Fire alarm = continuous bell
• Fire Exits
• Assembly point
• First aid
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Slide 4
Course Administration
• Start and finish times
• Breaks
• Daily attendance register
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Slide 5
Facilities
• Toilets
• Canteen/common room
• Drinks machines
• Internet facilities
• After class study room
Switch off Mobile PhonesSwitch off Mobile Phones
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Slide 6
Key Dates for the June 2010 exam
Registered with ACCA by 31 December 2009
Exam entry by 15 April 2010
Exam date 10 June 2010
Exam results 23 August 2010
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Slide 7
Three Steps to Success
Step 1Learning
Taught course
Step 2Practise &
revise
Revision course
Step 3Exam rehearsal
Question day
Final Mock
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Slide 8
How to use the revision material• Revision notes
– Skills bank – 5 key skills required to pass this paper– Knowledge bank – summaries of all key topics in the syllabus– Recent relevant articles from ACCA website
• Revision kit
– Preparation questions– Past exam questions – Mock exams– MyStudy online question debriefs
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Slide 9
Online Learning Environment - How to get access
Log in details emailed to you Not received log in details or have IT queries?
Contact [email protected] or telephone 0845 0751 100
Log in details emailed to you Not received log in details or have IT queries?
Contact [email protected] or telephone 0845 0751 100
Visit http://learn.bpp.com Visit http://learn.bpp.com
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Slide 10
Questions?
Why have we developed this?To reinforce key skills needed to pass the exam!
Why have we developed this?To reinforce key skills needed to pass the exam!
What’s included?Your printed Practice and Revision Kit in e-book and interactive formats, and a
selection of on line debriefs of key questions.
What’s included?Your printed Practice and Revision Kit in e-book and interactive formats, and a
selection of on line debriefs of key questions.
How does it work?You can access the online
learning environment from any PC* with an internet connection
*Minimum requirements apply
How does it work?You can access the online
learning environment from any PC* with an internet connection
*Minimum requirements apply
How much does it cost?Nothing! The online environment is provided at no
additional cost to the classroom course
How much does it cost?Nothing! The online environment is provided at no
additional cost to the classroom course
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Slide 11
Logging on to MyStudy…
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Slide 12
Your Learning Plan…
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Slide 13
Drilling down to the chapters…
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Slide 14
Launching an online lecture…
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Slide 15
What the online lectures look like…
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Slide 16 page 5
The examination paper
Examiner: Anthony HeadExaminer: Anthony Head
50% numerical 50% discussion
60% knowledge 40% application
Format of the Exam Marks
4 questions All compulsory worth 25 marks each 100
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Slide 17 page 5-6
Syllabus
A Financial management function
B Financial management environment
C Working capital management
D Investment appraisal techniques
E Sources of business finance
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Slide 18
Syllabus
F Cost of capital
G Business valuations
H Risk management
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Slide 19 page 22
Chapter 1- financial management & objectives
Maximisation of shareholder wealth
Maximisation of shareholder wealth
Total shareholder return =
dividend yield + capital gain
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Slide 20 page 22
Maximisation of shareholder wealth
Maximisation of shareholder wealth
Value for moneyValue for money
• Economy
• Efficiency
• Effectiveness
Chapter 1- financial management & objectives
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Slide 21 page 22
Maximisation of shareholder wealth
Maximisation of shareholder wealth
Value for moneyValue for money
Needs of other stakeholders
Needs of other stakeholders
• Internal
• Connected
• External
Chapter 1- financial management & objectives
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Slide 22 page 22
Maximisation of shareholder wealth
Maximisation of shareholder wealth
Value for moneyValue for money
Needs of other stakeholders
Needs of other stakeholders
• Corporate governance
• Incentive schemes
Corporate governanceAgency theory
Corporate governanceAgency theory
Chapter 1- financial management & objectives
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Maximisation of shareholder wealth
Maximisation of shareholder wealth
Investment decisionInvestment decision Financing decisionFinancing decision Dividend decisionDividend decision
Financial accountingManagement accounting
Financial accountingManagement accounting
Chapter 1- financial management & objectives
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Slide 24 page 26
Chapter 2 – economic environment
Maximisation of shareholder wealth
Maximisation of shareholder wealth
Investment decisionInvestment decision Financing decisionFinancing decision Dividend decisionDividend decision
Economic environmentEconomic environment
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Chapter 3 – financial markets & institutions
Maximisation of shareholder wealth
Maximisation of shareholder wealth
Investment decisionInvestment decision Financing decisionFinancing decision
Financial marketsFinancial marketsFinancial institutionsFinancial institutions
Dividend decisionDividend decision
DisintermediationMoney marketCapital market
Financial intermediaries • Maturity transformation• Aggregation of funds• Pooling losses
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Slide 26
Chapter 4 – working capital
Maximisation of shareholder wealth
Maximisation of shareholder wealth
Investment decisionInvestment decision Financing decisionFinancing decision Dividend decisionDividend decision
•cash operating cycle•sales /net working capital ratio•overtrading
Working capitalcan boost profits
Working capitalcan boost profits
Working capital cancause liquidity problems
Working capital cancause liquidity problems
Conflict between objectivesConflict between objectives
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page 32
Chapter 5 – managing working capital
Maximisation of shareholder wealth
Maximisation of shareholder wealth
Investment decisionInvestment decision Financing decisionFinancing decision Dividend decisionDividend decision
• holding cost Ch x Q/2• ordering cost Co x D/Q• EOQ• buffer stock• discounts • JIT
Managing working capitalManaging working capital
InventoryInventory
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Chapter 5 – managing working capital
Maximisation of shareholder wealth
Maximisation of shareholder wealth
Investment decisionInvestment decision Financing decisionFinancing decision Dividend decisionDividend decision
Managing working capitalManaging working capital
ReceivablesReceivables
• Policy• Credit analysis system• Credit control system• Debt collection
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Chapter 5 – managing working capital
Maximisation of shareholder wealth
Maximisation of shareholder wealth
Investment decisionInvestment decision Financing decisionFinancing decision Dividend decisionDividend decision
• Cost• Benefit
Managing working capitalManaging working capital
PayablesPayables
Foreign accounts receivableForeign accounts receivable
• Letters of credit• Bills of exchange• Invoice discounting• Export factoring
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Chapter 6 – financing working capital
Maximisation of shareholder wealth
Maximisation of shareholder wealth
Investment decisionInvestment decision Financing decisionFinancing decision Dividend decisionDividend decision
• layoutCash flow forecastingCash flow forecasting
Financing investments in working capitalFinancing investments in working capital
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Slide 31
LayoutJan
Cash receiptsSales receipts X
Issue of shares
XCash payments
Purchase payments XDividends X
Non current assets XWages X
XCash surplus/deficit XCash balance, beginning X
Cash balance, ending X
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Chapter 6 – financing working capital
Maximisation of shareholder wealth
Maximisation of shareholder wealth
Investment decisionInvestment decision Financing decisionFinancing decision Dividend decisionDividend decision
Mathematical modelsMathematical models
• Baumol • Miller-Orr
Funding investments in working capitalFunding investments in working capital
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Slide 33
Day 1 recap quiz
1. What is total shareholder return ?
2. What are the functions of a financial intermediary ?
3. What is the average inventory level in an EOQ system?
4. What are the advantages of JIT?
5. What sort of company might use a debt factor ?
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Slide 34
Day 1 recap quiz - solutions
1. (change in the share price + dividend paid) / start of year share price
2. Maturity transformation, aggregation, pooling losses
3. Q/2 + buffer
4. Avoid ‘hidden costs’ of inventory
5. Rapidly expanding small/medium sized company.
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page 40
Chapter 7 – investment decision
Maximisation of shareholder wealth
Maximisation of shareholder wealth
Investment decisionInvestment decision Financing decisionFinancing decision Dividend decisionDividend decision
ROCEROCE
Relevant costsRelevant costs
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Chapter 7 – investment decision
Maximisation of shareholder wealth
Maximisation of shareholder wealth
Investment decisionInvestment decision Financing decisionFinancing decision Dividend decisionDividend decision
paybackpayback
Capital budgeting framework
Capital budgeting framework
• Collecting ideas
• Screening out
• Financial analysis
• Review
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page 44
Chapter 8 – DCF methods
Maximisation of shareholder wealth
Maximisation of shareholder wealth
Investment decisionInvestment decision Financing decisionFinancing decision Dividend decisionDividend decision
NPVNPV IRRIRR
NPV vs IRRNPV vs IRR
1. NPV of the project at 5%2. NPV of the project at 10%3. Use formulaIRR = a + (NPVa x (b-a)) NPVa-NPVb
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page 48
Chapter 9 – allowing for tax & inflation
Maximisation of shareholder wealth
Maximisation of shareholder wealth
Investment decisionInvestment decision Financing decisionFinancing decision Dividend decisionDividend decision
Allowing for taxAllowing for tax
Tax payments
Total tax cash flow
Tax benefit from WDAs
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Chapter 9 – allowing for tax & inflation
Maximisation of shareholder wealth
Maximisation of shareholder wealth
Investment decisionInvestment decision Financing decisionFinancing decision Dividend decisionDividend decision
Allowing for inflationAllowing for inflation
LayoutLayout
If there is 1 rate of inflation - ignoreIf there is more than 1 rate of inflation - include
(1 + r)(1 + h) = (1 + i)(1 + r)(1 + h) = (1 + i)
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LayoutFlows T0 T1……… T4
Sales receipts X X
Costs (X) (X)
Operating cash flows X X
Taxation (X) (X)
Capital expenditure (X)
Tax benefit of CAs X X
Working capital (change) (X) (X) X
Net cash flows (X) X X
DF@ post-tax cost of capital X X X
Present value (X) X X
NPV - sum of the present values
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Chapter 10 – project appraisal & risk
Maximisation of shareholder wealth
Maximisation of shareholder wealth
Investment decisionInvestment decision Financing decisionFinancing decision Dividend decisionDividend decision
Project appraisal & riskProject appraisal & risk
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Slide 42 page 52
Risk and uncertainty
Predictable = risk
Predictable = risk
Unpredictable = uncertainty
Unpredictable = uncertainty
If the variability of a project’s outcome is
If the variability of a project’s outcome is
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Slide 43 page 52
Risk
Quantifying risk
• expected values
• risk adjusted discount factor
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Slide 44 page 52
Uncertainty
Describing uncertainty
• payback period (done)
• adjusted payback period
• sensitivity analysis
• simulation
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Chapter 11 – specific investment decisions
Maximisation of shareholder wealth
Maximisation of shareholder wealth
Investment decisionInvestment decision Financing decisionFinancing decision Dividend decisionDividend decision
Asset replacementAsset replacement
Capital rationingCapital rationing
Divisible: PV inflows investmentIndivisible – trial & error
Equivalent Annual CostNPV Annuity factor
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page 55
Chapter 11 – specific investment decisions
Maximisation of shareholder wealth
Maximisation of shareholder wealth
Investment decisionInvestment decision Financing decisionFinancing decision Dividend decisionDividend decision
Lease vs buyLease vs buy
Operating leasesFinance leasesNumerical analysis
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Slide 47
Day 2 recap quiz
1. What is the difference between ROCE & IRR ?
2. Why is NPV superior to IRR?
3. What is EAC and EAA and when are they suitable?
4. What type of finance might a company experiencing hard capital rationing consider using?
5. What is the difference between an operating and a finance lease?
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Slide 48
Day 2 recap quiz - solutions
1. Although both are % measures, ROCE does not adjust for the time value of money and may include non-relevant cash flows
2. NPV is an absolute measure of wealth and is more suitable for choosing between projects
3. They are expressions of the annual cost or benefit of a project and are appropriate for asset replacement decisions.
4. Leasing is one of the few sources of finance likely to be available.
5. Operating is short term and generally removes all the risks of ownership.
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Chapter 12 – sources of finance
Maximisation of shareholder wealth
Maximisation of shareholder wealth
Investment decisionInvestment decision Financing decisionFinancing decision Dividend decisionDividend decision
• overdraft• trade credit• debt factor• short-term loan
Short-term financeShort-term finance Long-term financeLong-term finance
• Debt • Venture capital• Leases• Preference shares• Equity
Sources of financeSources of finance
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Slide 50 page 59
Chapter 12 - continued
Methods of issuing new shares
• rights issue
• placing
• stock exchange introduction
• public offer
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Chapter 13 – dividend policy
Maximisation of shareholder wealth
Maximisation of shareholder wealth
Investment decisionInvestment decision Financing decisionFinancing decision Dividend decisionDividend decision
Dividend policyDividend policy M&M M&MDividend policyDividend policy
Key ratios•Dividend yield •Dividend cover •Dividend payout
Key ratios•Dividend yield •Dividend cover •Dividend payout
Lifecycle issuesLifecycle issues
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Chapter 14 – gearing & capital structure
Maximisation of shareholder wealth
Maximisation of shareholder wealth
Investment decisionInvestment decision Financing decisionFinancing decision Dividend decisionDividend decision
Small companiesSmall companies Mix of debt & equityMix of debt & equity
• L• O• S• S
Sources of financeSources of finance
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Slide 53
Chapter 15 – cost of capital
Maximisation of shareholder wealth
Maximisation of shareholder wealth
Investment decisionInvestment decision Financing decisionFinancing decisionInvestment decisionInvestment decision
Cost of capitalCost of capital
Cost of debtCost of debt
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Cost of irredeemable debt – with tax
Kd = i po
(1- t)
Formula not given
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Cost of redeemable debt
Time cash flows0 market value1-n interest (post tax)n redemption
IRR approach
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Slide 56 page 66
Cost of convertible debt
Time cash flows0 market value1-n interest (post tax)n redemption
• or value of shares if greater
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Slide 57 page 66
Cost of Preference Shares
Kpref = dPo
Formula not given
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Slide 58
Chapter 15 – cost of capital
Maximisation of shareholder wealth
Maximisation of shareholder wealth
Investment decisionInvestment decision Financing decisionFinancing decisionInvestment decisionInvestment decision
Cost of capitalCost of capital
Cost of debtCost of debt Cost of equityCost of equity
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Slide 59 page 66
Cost of equity
Ke = d1 + g
poDividend yield
Future dividend growth
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Slide 60 page 66
Cost of equity - assumptions
Ke = d1 + g
poDividends are paidCompany has a share
price Can be estimated &
constant
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Slide 61 page 66
CAPM - formula
E(r) = Rf + β (E(Rm) – Rf)E(r) = Rf + β (E(Rm) – Rf)
Risk free rate
Market premium for
risk of holding shares
Risk of this share
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Slide 62 page 66
% of total finance that is equity
% of total finance that is debt
WACC = Ve Ke + Vd Kd (1-T)
Ve+Vd Ve+Vd
WACC formula
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Slide 63
Chapter 16 – capital structure
Maximisation of shareholder wealth
Maximisation of shareholder wealth
Financing decisionFinancing decision
Capital structure – theories
Capital structure – theories
• M&M – no tax• M&M – with tax
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Slide 64 page 68
Gearing structure - summary
Low gearing
High gearing
Young company
Financial distress costs
Mature company
Tax benefits
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Project specific (marginal) cost of capital
1. Find a quoted company in that business
2. Ungear & regear their beta
3. Calculate Ke
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Slide 66
Day 3 recap quiz
1. What is a theoretical ex rights price ?
2. What factors should influence the level of debt that a company takes on ?
3. Which is the best way of calculating the cost of equity?
4. How is the cost of convertible debt calculated?
5. How is a project specific cost of capital calculated ?
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Slide 67
Day 3 recap quiz - solutions
1. The price of a share after a rights issue, this will often be diluted since the rights issue is at a discount.
2. Lifecycle, operational gearing, security, stability of cash flows.
3. The CAPM is the more stable model.
4. The IRR of the cash flows, using the higher of the par value or the value of the shares at redemption.
5. Ungear a similar company’s beta, regear to your level of debt, then calculate a new Ke.
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Slide 68 page 72
Chapter 17 – business valuations
Maximisation of shareholder wealth
Maximisation of shareholder wealth
Investment decisionInvestment decision Financing decisionFinancing decision Dividend decisionDividend decisionInvestment decisionInvestment decision
Avoid over-payingfor acquisitions
Avoid over-payingfor acquisitions
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Slide 69
Range of values
Max value
= earnings method or DCF
under new ownership
Intermediate value
= dividends
under existing ownership
Min value
= assets basis
Maximum value
Minimum value
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Slide 70 page 72
Earnings basis
Market value = P/E x earnings
Growth prospects Current profitability
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Slide 71
Chapter 18 – market efficiency
Maximisation of shareholder wealth
Maximisation of shareholder wealth
Investment decisionInvestment decision Financing decisionFinancing decision Dividend decisionDividend decisionInvestment decisionInvestment decision
Business valuations guided by stock market valuationBusiness valuations guided by stock market valuation
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Slide 72
The efficient markets hypothesis
Levels of efficiency
• weak form - historic
• semi-strong form – also publicly available information
• strong form – also reflects information held privately by directors
Behavioural financeBehavioural finance
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page 78
Chapter 19 – foreign currency risk
Maximisation of shareholder wealth
Maximisation of shareholder wealth
Investment decisionInvestment decision Financing decisionFinancing decision Dividend decisionDividend decision
Foreign exchange riskForeign exchange risk
Economic riskTranslation risk
Transaction risk
TerminologyTerminology
• 1.9615 $ /£• 0.5098 £/$
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Slide 74 page 78
Forward contracts
Forward rates: 1.9600 – 1.9612
Or 1.9606 +/- 0.0006
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Slide 75 page 78
Money market hedge - exporter
Expect $ revenue in 3 months time
Borrow in $s today
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Slide 76 page 78
Money market hedge – 5 steps (exporter)
1. Receive $s
$£
now
3 mths 2. Repay $ loan
3. Take out $ loan4. £s today
5. Compare to a forward
This determines the size of the $
loan
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Slide 77 page 78
Money market hedge - importer
Expect $ costs in 3 months time
$ deposit today
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Slide 78 page 78
Money market hedge – 5 steps (importer)
1. Pay $s
$£
now
3 mths 2. Using $ on deposit
3. $ deposit4. Withdraw £s
5. Compare to a forward
Determines the size of the $
deposit today
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Slide 79 page 79
Derivatives – futures
1. Receive $s – use spot rate
3 monthsNow
4. Or losses if ex rate moves in your favour
4. Compensation ifex rate moves
against you
2. Contract to buy £ - futures market3. Pay a depositStandard contract
sizes
5. Fixed outcome
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Slide 80 page 79
Derivatives – options
1. Receive $s
3 monthsNow
4. Or use spot rate if it moves in your favour
4. Use if ex rate moves against you
2. Contract to buy £ - call option3. Pay a premium
5. Worst case known
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Slide 81 page 80
Four way equivalence
Inflation rate differences
Exchange rate movements
PPP theory
Interest rate differences
Forward ratesIRP theory
High interestrates due tohigh inflation
High interest rates predict a decline in the exchange rate
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Slide 82 page 80
Four way equivalence
Inflation rate differences
Exchange rate movements
Interest rate differences
Forward rates
Forward rate is an unbiased indicator of the future spot rate
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page 82
Chapter 20 – interest rate risk
Maximisation of shareholder wealth
Maximisation of shareholder wealth
Investment decisionInvestment decision Financing decisionFinancing decision Dividend decisionDividend decision
Interest rate riskInterest rate risk
•Higher costs on existing loans•Higher costs on planned loans•Basis risk•Gap exposure
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The yield curve
% yield
Time to maturity
Normal yield curve
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Slide 85 page 82
Managing interest rate risk - FRAs
£5m 3-9 FRA at 5%
Size of loan
Start & end
month
Base rate
guaranteed
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Slide 86
Exam Technique – how to pass
• Know the syllabus content well
• Use your 15 minutes reading time well
• Effective time management
• Apply your knowledge to the specifics of scenario presented
• Construct your answer logically and coherently
• Do not waffle
• Use a clear layout and show your workings
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Slide 87
Exam Technique – how to avoid failing
Do NOT
• Mismanage your time
• Misread the question/requirement
• Answer the question you wish it was
• Leap in without a plan
• Present your answer crudely and in an unprofessional manner
• Dump knowledge instead of applying it
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Slide 88
What to do now……
• Revise using your course notes for more detail
• Refer to the Passcards issued on the taught courses as a frequent aide-memoire
• Extensive question practice
– Paper in a day
– P&R kit
• Get help for technical queries
• Step 3 …..
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Slide 89
Three Steps to Success
Step 1Learning
Taught course
Step 2Practise &
revise
Revision course
Step 3Exam
rehearsal
Question day
Final Mock