AFE5013-B Multinational Finance and Investment - University of Bradford School of Management

Part 1:

QUESTION 1. (500 words maximum)

Please read the instructions carefully. The following questions are related to the following risky equitiy securities issued by:

GSK: Glaxosmithkline PLC (Reg. no: 03888792). It manufactures various pharmaceutical products.

BAT: British American Tobacco PLC (Reg. no: 03407696). The holding company owns, directly or indirectly, investments in the numerous companies constituting the British American Tobacco Group activities include the manufacture, distribution or sale of tobacco and nicotine products.

Required:

Please address the following questions:

a) Calculate the monthly rates of return for each of the securities
• Your calculation should be using the monthly closing stock prices from January 2008 to December 2014 published in FAME (Financial Analysis Made Easy) database. The figures in FAME have been adjusted based on the stock split/dividend ratio. (Note: Students are required to learn how to use FAME database to extract the required financial information).
• You can use Microsoft Excel functions to expedite your calculation, but please show the mathematical formula used.
• Please show rates of return up to three digits after decimal point. For example, 0.000 instead of 0.000%.

b) Based on your calculation in (a), calculate for each of the chosen securities:
i. Average monthly rate of return (Note: Assume each monthly return has equal chance to occur).
ii. Standard deviation of the monthly rates of return in the sample.

(You can use Microsoft Excel functions to expedite your calculation. Please show answers up to three digits after decimal point)

c) Calculate the weighted average rate of return and standard deviation of returns for the portfolio containing the combination of your two chosen securities in varying weights as indicated below. Then, choose a recommended portfolio. Summarize your answers in the following table for the BAT-GSK portfolio:

d) For each of the portfolios in (c) above, plot the portfolio risk-return for different weights of assets (Note: For the risk-return plots, return is on vertical axis and risk is on horizontal axis). Discuss what do you learn from this analysis.

QUESTION 2. (1000 words maximum)

a) Critically discuss some of the practical difficulties in measuring a financial asset's risk. Support your answer by citing relevant theories or models covered in this module.

b) Critically discuss the empirical tests and evidence relating to efficient market hypotheses.

Part 2:

Question 3. (1000 words maximum)

a) MM bond is currently priced at discount, £918.89. The bond's par value is £1000. It promises fixed regular income to investors at 6% per annum. Coupon is paid twice per year. It has 5 years remaining to maturity.

(i) Based on the information above, what is the appropriate annual coupon rate for a newly issued bond that belongs to the same risk class to MM bond? Support your argument by showing your calculation.

(ii) Discuss whether the price of MM Bond above will be more volatile to changes in the market interest rate than Bond XYZ below. Support your argument by showing your calculations of Macaulay Duration.

b) Critically discuss three hypotheses or theories that can be used to explain the shape of yield curves and their practical implications.

c) By citing relevant academic studies, critically discuss factors that can influence credit risk and practical difficulties in estimating credit risk.

Question 4. (1000 words maximum)

a) A company in the United States received an invoice of £200,000 from a firm in England. The spot rate of pound when the invoice was received was $1.50. The invoice should only be paid six months from now. Forecasted spot rates six months from now are given as below:

The six-month forward rate is $1.47. A call option on pounds that expires in six months has an exercise price of $1.48 and a premium of $0.03. A put option on pounds that expires in six months has an exercise price of $1.49 and a premium of $0.02.

Required:

If the invoice is to be paid six months from now, illustrate by showing your calculations, whether the firm will be better off by using forward contract to hedge the forex transaction risk.

b) By considering relevant theories, critically discuss factors that can affect foreign exchange rates.

c) Describe and discuss several ways that multinational firms can implement to manage exchange rate risk.

Attachment:- Multinational Finance and Investment.rar