CONFIDENTIAL 1 AC/JAN 2018/MAF653

MAF653
SUGGESTED SOLUTION
JANUARY 2018
QUESTION 1

A. i.
Year Dt-1 Dt DF (12%) PV
1 1.50 1.65 0.8929 1.473
2 1.65 1.815 0.7972 1.447
3 1.815 1.997 0.7118 1.421
4 1.997 2.197 0.6355 1.396
5.737
P4 25.143 0.6355 15.978
21.715

P4 = D5
k-g
= 2.197 (1.03) 
0.12 – 0.03 
= 25.143

Therefore, the maximum price the investors would be willing to pay is RM21.72. 

(8 x ½= 4 marks)
ii.

P4 = D5
k
= 0.5
0.12
= 4.167

PV of P4 = 4.167 (0.6355) 
= 2.648

Value of stock = 5.737 +2.648 = RM8.385

Therefore, the maximum price the investors would be willing to pay is RM8.39. 

(6 x ½= 3 marks)

B.
Year Dividend DF (14%) PV
1
2
3
4 2.00 0.5921 1.1842
5 2(1+0.08)= 2.16 0.5194 1.1219
6 2.16(1.+0.08)=2.33 0.4556 1.0615
P1 = 3.3676

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P2= D7 = D6(1 + g)
k-g k-g
= 2.33  (1+0.10)  = 64.075 X 0.4556 = 29.1926
0.14 – 0.10 RM 32.56
(12 x ½ = 6 marks)
C.

i. Since the intrinsic value of Axera’s shares is currently higher than the selling price in
the market, Alex should place a market order to buy the share at the best price available
now. Market order is an order to buy or sell securities at the best price available at time the
order is placed. 

Since the price is falling, Bent should place a stop loss order, to minimize the loss incurred.
 Stop loss order is an order to sell a particular stock at the next available opportunity after
the price of the stock reaches a specified amount. 

Since Malique plan to buy the shares when the selling price reaches RM39.50, he should
place a limit order. Limit order is an order to buy or sell securities at a specified price (the
limit) or better.

(6 = 6 marks)

ii. The potential reason for the fall in price of Maslad Bhd’s shares could be due to the low
demand  and/or high supplies of the shares. This could happened when investors does
not have the confidence in the company, and started to sell their shares.

Mispricing of share could also happen in a less efficient market, where market price does
not reflect all information, but only publicly available information. 
(Any one reason with explanation 2 x 1 mark = 2 marks)

(Total: 21 marks)

QUESTION 2

A. i
i.Treasury bills are issued by the government, certificates of deposits are issued by
banks or financial institutions
ii.T-bills have an active secondary market if to be sold prior to maturity, CDs will have
to pay for penalty if withdraw before maturity.
iii.Yield on CDs should be higher than the rate on a T-bills.
Or any other relevant answers.
(6 x 1= 6 marks)

ii
 Repurchase agreement is a legal contract between a borrower and a lender. 
 Repurchase transactions involves the sale of securities at a particular price by a
repo seller to a repo buyer whereby the repo seller gives a commitment to
repurchase the equivalent securities from the repo buyer. 
 Any other relevant answers.

(Any 2 x 1= 2 marks)
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B.
i.
PV = 90/2X PVIFA 5%, 24 + 1000 X PVIF 5%, 24
= 45 (13.7986) + 1000(0.3101)
= 620.937 + 310.1
= RM931.037

ii.
PV = 45X PVIFA 5%, 6 + 1180 X PVIF 5%, 6
= 45 (5.0757) + 1180(0.7462)
= 228.41 + 880.52
= RM1108.93
(12x ½=6 marks)

C. Bond Price = RM140 (PVIFA 10%, 8) + RM1,000 (PVIF 10%, 8)
= RM140 (5.3349) + RM1000 (0.4665)
= RM746.89 + RM466.5
= RM1213.39

The bond is underpriced. Therefore it is wise to invest in Wardah Bhd’s

bond.

(5x 1=5 marks)

D. The bond can be converted into 50 shares, therefore the conversion value now is
RM1150 (RM23 x 50). However, if the company were to call the bond, the cost is only
RM1060 [1000+ (6%x1000)]. Since the cost of calling the bond is lower than the
conversion value, Interim Bhd should call the bond now. 
(6x ½ mark = 3 marks)

QUESTION 3

A.

i. Benefits of trading in futures include:

The contract specification is standardized, so it’s easier to find buyers and
sellers
The clearing house monitors the trade between the sellers and buyers of
futures. Thus, counter party risk is very small. 
Investors can use margin account. 
Any other benefits
(Any 2 x 1= 2 marks)

ii. F = S(1 + r - y) ͭ
F = 1,070 (1 + 0.05 – 0.03) (75/360) 
= 1,070(1.0041)
= RM1,074.39
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(5 x1= 5 marks)

iii.If the future price is lower than the fair price, Zharif can make riskless profits by
simultaneously going long (buy) the futures contract and short (sell) the
shares that make up the underlying. 

If the future price is higher than the fair price, Zharif can make riskless
profits by simultaneously going short (sell) the futures contract and long (buy)
the shares that make up the underlying. 
(4 x ½ mark = 2 marks)

B.
i. The profit that the manager makes from this transaction:

Contracts required = Amount to be hedged ÷ Value of contract

=RM5M/ (RM50 × 1,750) 
= 57 contracts

Position today Month – May 2017 Gain/loss.

Position at maturity
Spot market Expecting funds of RM40 Receives RM 40 million
million in September.
Index has risen.

Future market The May contract is May where it closes at

currently trading at 1,750. 1820. Sell future contract
Buy future contract.

57XRM50X 1,750 57X RM50 X 1820

= RM4,987,500 = RM5,187,000
Net gain RM 199,500

(10 x ½= 5 marks)

ii. The portfolio manager was successful.  He made a profit of RM199,500 on his
futures trading. This profit will be used to reduce  the anticipated cost of buying the
shares in October where prices would have increased.
(4 x ½= 2 marks)

C.

i. Number of contracts to buy = (1,600,000/2,000)/25

= 800/25
= 32 contracts

Buy at : 32 x 25 x RM2,050 = (RM1,640,000) 

Sell at : 32 x 25 x RM2,400 = RM1,920,000 
Gain RM280,000

(10 x ½= 5 marks)

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ii. Cost of purchase CPO = 800 x RM2,400 = RM1,920,000

Net cost = RM1,920,000 – RM280,000 = RM1,640,000

Effective price per metric tonne = RM1,640,000 /800 metric tonnes

= RM2,050

Purchase price if there is no hedging = RM2,400

Therefore, it is more profitable to hedge using futures as the price is lower. 

(8 x ½=4 marks)

(Total: 25 marks)

QUESTION 4

A.

i) Profit or Loss

a. Long Call Option (Right to buy): [RM1680 – RM1510] = RM170√ – RM35 =

RM135√ (Profit)

b. Short Put Option (Right to sell): [RM1550 – RM1650] = -RM100√ + RM25 =

-RM75√ (Loss)

c. Long Put Option (Right to sell): [RM1755 – RM1660] = RM95√ – RM40 =

RM55√ (Profit)

d. Short Call Option (Right to buy): [RM1715 – RM1750] = -RM35√ + RM10 =

-RM25√ (Loss)

Total Profit/Loss: RM135 – RM75 + RM55 – RM25 = RM90√√

(10 √ x ½ = 5 marks)

B. Workings

Stock price (S) = RM38.00

Exercise price (K) = RM35.00
Interest rate (r) = 6%
Maturity (T) = 3 months
Std. deviation ( = 0.54

a. Call option price:

C = S.N(d1) – Ke-rt .N(d2)

= RM38√ (0.6897)√ – RM35e (-0.06 x 0.25) √(0.5891)√
= 26.2086 – 35(0.9851) (0.5891)
= 5.8973

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(4√ x 1 = 4 marks)

b. Put option price:

N(-d1) = 1 – 0.6897
= 0.3103

N(-d2) = 1 – 0.5891
= 0.4109

P = 35√ (0.9851)√ (0.4109)√ – 38(0.3103)√

= 14.1672 – 11.7914
= 2.3758
(4√ x ½ = 2 marks)
C. i. In this interest rate swap transaction, Puncak Jaya should borrow floating interest
rate√ and Puncak Lestari needs to borrow fixed interest rate√. Both companies will
do the interest swapping which are the Puncak Jaya is the floating rate receiver√ and
Puncak Lestari is the fixed rate receiver√.

The difference in rates is 0.50% and each party will gain 0.16% equally√.

(5√ x 1 = 5 marks)

ii. Benefits a company can get when they entered into a swap:-

 Reduce exposure to changes in the interest rates on a particular transaction.


 Reduce the costs of borrowing with respect to bonds. 
 Can manage their exposure to the changing market conditions in advance of
anticipated issuance of bonds. 
 Can achieve more flexibility in meeting the overall financial objectives. 
 Can obtain customized cash flows to match the required payment obligations
or revenue projections. 
 Any other relevant answer. 
(Any 2 x 2 marks = 4 marks)

(Total: 20 marks)

QUESTION 5

A.
 Education and awareness
 Product innovation and development
 Performance benchmark
 Risk management capabilities
 Information technology
 Skilled human resources 
(Any 3 x 1=3 marks)

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CONFIDENTIAL 7 AC/JAN 2018/MAF653

B. Any relevant explanation about:

 Riba
 Maysir (gambling) 
 Gharar
 Production or distribution of non-halal or unlawful goods and services. 

(Any 2 x 1.5=3 marks)

C.
 Hibah is a gift or a token of appreciation by the borrower to the lender which
usually takes place when there is a Qard Al-Hassan. 
 Hibah is given voluntarily by debtor to creditor upon payment of the loan. 
 Hibah is normally not stipulated in the agreement. 
 It is at the discretion of the borrower. 
 Hibah is highly desireable (sunat muakad) as a token of appreciation to honor the
service or assistance from the lender. 
(Any 3 x 1=3 marks)

D. Differences between conventional and Islamic products:

i. The conventional securities and the Islamic securities differ in its structure in terms of
complying with Islamic principles in its issuance. 
ii. Conventional involves the use of interest but Islamic securities prohibits riba. 
(Any 3 x 1=3 marks)

(Total: 12 marks)

END OF SOLUTION

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