Winter 2022 Practice Exam
COMMERCE 3FD3
Instructions:
(1) Examination duration: 120 minutes.
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(2) There is a total of 5 questions in this examination.
Student Number Surname
Given Name
COMMERCE 3FD3 Practice Exam Winter 2022
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(3) There is an Excel file with 3 worksheets accompanying this examination.
(4) You need to show the formulas in your Excel cell, whenever you use a formula.
(5) If you use some features without a formula, please explain briefly how you get the results (e.g., use solver in Excel…).
(6) Please submit one Excel file by the end of the examination.
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Winter 2022 Practice Exam COMMERCE 3FD3
Question 1 [20 marks]:
In worksheet ¡°Q1¡±, you can find some key accounting data for a firm named ¡°AAA¡±.
a) Assume now is Dec 31st, 2021. Based on the pro forma assumptions in the worksheet, forecast the accounting data for 2022.
b) Get the free cash flow (FCF) for 2022.
c) Now assume WACC=7.5%, short-term FCF growth rate as 15% in 2023/24/25/26, and long-term FCF growth rate as 5%. What is the share value of ¡°AAA¡±? Assume there are 1,000 shares outstanding.
Question 2 [20 marks]:
In worksheet ¡°Q2¡±, you can find monthly price data for 4 stocks.
a) Calculate the monthly log returns for each of them. What is the annualized variance- covariance matrix for them?
b) Given two constants 2% and 10%, find two envelop portfolios. Let¡¯s call them portfolio A and B, respectively. Show the weight of each stock in each portfolio.
c) Based on portfolios A and B, you want to build another envelop portfolio C, which is on the efficient frontier and has a standard deviation of 20%. What is the weight you want to invest in portfolio A?
Question 3 [20 marks]:
In worksheet ¡°Q3¡±, you can find 10 annual-coupon bonds data, they are all sold at par.
a) Find the term structure based on the data, plot the yield curve on a chart. Why we usually use the yields from zero-coupon bonds to describe the term structure, rather than using the YTMs from coupon bonds?
b) There is a bond N on the market, which also pays annual coupons. The face value is $1,000, time to maturity is 5 years and coupon rate is 4%. What is the YTM of this bond?
c) Assume there will be no change in YTM for bond N in the next year. The default probability for bond N in the next year is 10% and if it defaults, you will only get back 80% of the face value. What is the expected return for bond N in the next year? Assume you will sell the bond at market value right after you receive the coupon payment if it does not default in the next year.
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Winter 2022 Practice Exam COMMERCE 3FD3
Question 4 [20 marks]:
A floating strike lookback call option gives the holder the right to buy an asset at its lowest price observed during the life of the option. This observed price is applied as the strike price. The payoff for a call option at expiration (time T) is essentially the asset price at time T minus the minimum price observed during the life of the option.
a) Now consider a stock with annual mean return of 8% and annual standard deviation of 20% and current stock price of $100. Simulate a stock path with daily prices for this stock in the next year. Plot the stock path on a chart. Assume there are 252 trading days in a year.
b) Now assume there is a floating strike lookback call option on this stock. The option will expire in one year. What is the expected mean payoff of this option at expiration? You can use a data table to solve this problem. At least 100 simulations are needed in the data table.
Question 5 [20 marks]:
There are two stocks: stock 1 and stock 2. Stock 1 has mean return of 8% and standard deviation of 20%. Stock 2 has mean return of 12% and standard deviation of 25%. They have a correlation of 0.7.
a) Now consider a portfolio with 70% invested in stock 1 and the remaining 30% in stock 2. Simulate the daily returns of this portfolio in the next month. Assume 252 trading days in a year and 21 trading days in a month.
b) What is the VaR (in terms of return) at 5% level for the portfolio at the end of next month? What is the meaning of the VaR in this case? You can use a data table to solve this problem. At least 200 simulations are needed in the data table.
END OF EXAMINATION
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