Annuity Growing annutiy

Cost of machine $ (40,000.00) Cost of machine

CF1 $ 20,000.00 CF1 (first year)
CF2 same CF1 CF2
CF3 same CF1 CF3
CF4 same CF1 CF4
CF5 same CF1 CF5
Salvage $ 10,000.00 CF6
n 5 Salvage
k 0.17 n (including first year)
k=r discount rate
PV of Annuity= $63,986.92 63986.92 g (growing rate)
PV of Salvage= $ 4,561.11 4561.11 1+g/1+r =
(1+g/1+r)^n =
NPV= $ 28,548.03 $ 28,548.03 r-g =

Incremental value (NPV) = value of the firm =PV less COST

PV of Annuity=
IRR internal return rate : khi NPV=0 PV of Salvage=

NPV =
 C*(1-[(1+g)/(1+r)]^n /(r-g)

$ (78,000,000.00)
$ 25,000,000.00
growing
growing
growing
growing
growing
$ -
6
0.17
0.10
0.94
0.69
0.07

$ 110,491,840.92
$ -

$ 32,491,840.92
 Calculating taxable with franked divide
Company Taxable income 100
Company tax rate 0.3 corporate tax rate
Company tax = D2*C3= 30
Net profit / after tax profit = 70
Dividend per share
100% Franked dividend received
(dividend on which company
Shareholder already paid tax) 100% mean fully franked) $ 70.00 70% partly franked dividend per share

Franking credit
= franked div*[comp tax rate/(1-
comp tax rate)]=D7*C3/(1-C3)
tax rebate or tax return $ 30.00 franking credit per share=J7*J3/(1-J3)=
Gross up amount
=franked div+ frankingcredit
taxable income = $ 100.00 taxable income =J6+J8 =
Marginal personal income tax rate
plus medicare 0.39 SH's marginal income tax
Marginal tax libility = $ 39.00 Marginal tax liablility per share
less Franking credit $ (30.00) less franking credit per share
Tax payable = $ 9.00 Tax payable per share

A shareholder whose marginal tax rate is lowerthan the company tax rate will pay no tax on the dividend received, and the ex

the shareholder is entitled to a franking credit greater than the income tax payable, the shareholder will receive a cash tax ref
The Australian dividend imputation system applies only to Australian company tax paid;

In Australia • Dividend imputation: pass tax credits for Australian company tax already paid to shareholders when dividends
credit. The grossed-up amount is added to the shareholder’s taxable income, but the shareholder is able to reduce the tax
taxation of capital gains has varied over time. at least 50 per cent of a capital gain to be included as taxable inco
 g taxable with franked dividend per share

0.3
unfranked dividends have not had any tax paid on them,
Partly franked dividends have only had part of the tax paid,
$ 0.80 % partly franked 70%

y franked dividend per share= $ 0.56

redit per share=J7*J3/(1-J3)= $ 0.24

come =J6+J8 = $ 1.04

inal income tax 0.37

tax liablility per share $ 0.38 Number of shares hold 100
ng credit per share $ (0.24)
ble per share $ 0.1448 Tax payable = $ 14.48

dividend received, and the excess franking credit canbe applied against other taxable income.

lder will receive a cash tax refund.

shareholders when dividends are paid . franked dividend and the tax transfer is called a franking
lder is able to reduce the tax payable with the amount of the franking credit. • In Australia the
to be included as taxable income. Capital losses may be used to offset capital gains.
Capital structure debt-equity ratio
0.2
SH's interest ratio
0.9

Liquidity Current ratio

1.50
Liquid ratio
1.20

Debt servicing Interest cover ratio

1.72

Profitablility EBIT to total funds ratio

0.51
EBIT to long term funds
0.64
Return on equity
0.63
EPS earning per share
0.65
Price to earning P/E
23.08
Share price to net tangible asset ratio
0.05

An investor will consider a range of financial performance indicators when analysing the future
earnings and profitability of a company.
• Capital structure looks at the risks associated with the funding of a firm, including the debt-to equity ratio
• Liquidity considers the access a company has to liquid funds to meet its day-to-day
commitments.
• Debt servicing analyses the ability of a company to meet payments on its liabilities over
different business scenarios.
• Profitability analyses the earnings per share of a company and its return on equity.
• The share price is the present value of forecast future net cash flows. Within this context, an
investor will consider the price to earnings (P/E) ratio.
• An investor will analyse systematic risks (e.g. the impact of an increase in interest rates on debt
facilities) and unsystematic risks (e.g. the impact of a computer system failure). Investors should,
in part, manage systematic risk using beta factors, and diversify away unsystematic risk.
 debt 10
equity 50
SH's funds 90
Total asset 100

Current asset 150 AR, Inventory, ST investment =CA

Current liabiliaty 100 AP, ST debt ( bank OD, commercial paper, bill dr
Current asset- inventory= 85 Current asset 100
Current Liablility - Bank Overdraft = 71 Current Liabli 98

less than 1: operation loss before income tax

Earning before finance lease charge, interest and tax 100 negative : loss even before interest expense
finance lease charges and interest 58 deducted

EBIT 180
Total funds (SH's funds +borrowing) 350
EBIT 180
Long term funds (=total funds- short term debt) 280
Operation profit after tax 125
Equity (SH/s funds) 200
Net income 130
Number of outstanding ordinary share 200
Market price of share 15
EPS 0.65
Current share price 15 this may less
formthan 1, thefor
the basis share price company
another is at a disct
Net tangible asset 300 the company that theoretically may b

nge of financial performance indicators when analysing the future

a company.
the risks associated with the funding of a firm, including the debt-to equity ratio and the type of debt held.
cess a company has to liquid funds to meet its day-to-day

e ability of a company to meet payments on its liabilities over

earnings per share of a company and its return on equity.

ent value of forecast future net cash flows. Within this context, an
ce to earnings (P/E) ratio.
stematic risks (e.g. the impact of an increase in interest rates on debt
sks (e.g. the impact of a computer system failure). Investors should,
sk using beta factors, and diversify away unsystematic risk.
 ST investment =CA
bank OD, commercial paper, bill drawn)=CL
Inventory (stock on hand) 15
Bank OD 27

: operation loss before income tax

loss even before interest expense
deducted

mthan 1, thefor
the basis share price company
another is at a discount
to take over the assets of
company that theoretically may be undervalued

ld.
price of a dividend-paying ordinary share is equal to the present value of all future dividends
g dividend growth rate Cum-dividend and ex-divid
D0 : div this year PO Current share price cum= with, ex = without.
D1=D0*(1+g) Dt Expected dividend per share in period cum -dividend: the buyer o
estimated div next year rs required Rate of return ex-dividend : seller will rece
t number of period
constant dividend (a perpetuity) Share price cum-dividend
Current share price PO = DO/rs = $ 3.33 Dividend paid per share
Dividend this year DO $ 0.50 Theoretical ex-dividend pr
rs 0.15 dividend : declare date - >
->record date (company re
Dividend with growth rate (GGM Model) t 3
dividend growth rate g 0.07
expected div. per share in period Dt = DO*(1+g)^t= 0.92 Bonus share issues
Div paid date 0 (this year) DO $ 0.75 based on a predetermined
required rate of return rs 0.12
current share price PO = DO * (1+g)/(rs-g)= $ 16.05 Cum-bonus share pric
Pro-rata right ordinary share Market value of four cum-bonus
rights issues 3 10 Theoretical value of five ex-bonus sha
N :#shares required to obtain one rights issue share, Theoretical value of one ex-bonus sh
1 right requires N ordinary
shares C20/B20 = 1 3.3333
Cum-rights share price $ 2.82 with the bonus issue,a greater numbe
Market value of cum-rights shares=C23*C20 = $ 28.20
Subscription price or discount price $ 2.600 Share splits :
total funds raised from right issue sales
=B20*C25 = $ 7.80 ratio of the split
Gives: Pre-split share price
Market value of ex-rights share =C24+C26= $ 36.00 Theoretical ex-split share p
Therefore: to increase the liquidity of
Theoretical ex-rights share price )(value per
share after offering /following the right issue ) =
$ 2.7692 share split lowers the price o
value of the right per share (C30-C25)= $ 0.1692 no change in total dollar va
Renounceable: a right that can be sold before it is executed and has value shares outstanding, boostin
A dividend, or cash payment m
If the stock split happens after
Value of the right If the stock split happens befo
N*(cum-rights price − subscription price)/(N + 1) =
$ 0.1692 a cash dividend will not be
XYZ Corp. has plan to pay a
Right given to SH to purchase additional stock share in proportion to their holding million shares outstanding.
happens after the record d
cum-right share allows new buyer to collect the right that have yet distrubuted but 8
are declared
share trading ex-right (passed the expiration of the right offering period, already
been exercised by original holder or have been transferred to other party
: holder no privilege to buy at discount price
XYZ Corp plans to pay a qu
there are initially one millio
one million shares outstan
company will be taking the
shares outstanding. The sh
stock split; it's just split bec
 XYZ Corp plans to pay a qu
Theoretical ex rights share price is weighted average of the price of shares there are initially one millio
before the issue of rights and the price of the rights shares one million shares outstan
company will be taking the
shares outstanding. The sh
stock split; it's just split bec

Value of holding after rights issue

=total number of shares after right issue * theo ex right shaare price

existing shares 200 200

right shares = 60 60 selling rights
total shares = 260 200

value of holding after

rights issue C30*B47 = $ 720.00 $ 553.85
less cost of buying
rights share B46* C26 = $ 468.00 $ 10.15 sale of right(C46*C31)
position B48-B49= $ 252.00 $ 564.00 (C48+C49)
Cum-dividend and ex-dividend share prices
cum= with, ex = without.
cum -dividend: the buyer of a share will also receive the next dividend payment
ex-dividend : seller will receive the next dividend

Share price cum-dividend 1

Dividend paid per share 0.05
Theoretical ex-dividend price = 0.95
dividend : declare date - > ex-dividend date (normally 1 day before record date)
->record date (company records which SH receives dividend)- >pay date
If you purchase a stock on its ex-dividend date or after, the seller gets the dividend.
If you purchase before the ex-dividend date, you get the dividend.

Bonus share issues

based on a predetermined ratio, such as one bonus share for every four ordinary shares held

Cum-bonus share price #ordinary share 4 # bonus share 1

Market value of four cum-bonus shares $ 10.00 per share
Theoretical value of five ex-bonus shares = J19*L18 = $ 40.00
Theoretical value of one ex-bonus share = J20/(L18+O18)= $ 8.00

with the bonus issue,a greater number of shares to be serviced with dividends in the future> higher profitability is expected.

Share splits :
five for one
ratio of the split (20%split) 5 1
Pre-split share price 40
Theoretical ex-split share price= 8
to increase the liquidity of the shares on the stock market.

share split lowers the price of the individual stock while increasing the number of outstanding shares.
no change in total dollar value of all outstanding shares, only increases the number of
shares outstanding, boosting liquidity.
A dividend, or cash payment made periodically by a company, is impacted by a stock split depending on the dividend's date of record,
If the stock split happens after the date of record, then the dividend is paid out as normal and there is no impact on the payout
If the stock split happens before the date of record then the dividend's total dollar value will stay the same, but the per-share price will be adjusted to refle
a cash dividend will not be issued to new shares that were created from a stock split if the split date occurs after the dividend's date of re
XYZ Corp. has plan to pay a $2.50 dividend per share on Dec 8 to all of its SH on record as of Dec1 for one
million shares outstanding. the stock is planning to have a two-for-one stock split on De6. Since the split
happens after the record date, all those newly created shares will not be eligible for the dividend on Dec
8

XYZ Corp plans to pay a quarterly $2.50 dividend per share on Dec 8 with record date as of Dec1, when
there are initially one million shares outstanding. a stock split on November 31, meaning the holders of the
one million shares outstanding will now be the holders of two million shares outstanding. As a result, the
company will be taking the $2.5 million and then issuing a $1.25 dividend to the holders of its two million
shares outstanding. The shareholders still receive the same dividend payout they would have before the
stock split; it's just split because the shares were doubled.
 XYZ Corp plans to pay a quarterly $2.50 dividend per share on Dec 8 with record date as of Dec1, when
there are initially one million shares outstanding. a stock split on November 31, meaning the holders of the
one million shares outstanding will now be the holders of two million shares outstanding. As a result, the
company will be taking the $2.5 million and then issuing a $1.25 dividend to the holders of its two million
shares outstanding. The shareholders still receive the same dividend payout they would have before the
stock split; it's just split because the shares were doubled.

(C46*C31)
are price will be adjusted to reflect the increased number of shares after the stock split
 I=A*d/365*i I=A*n*i n =d/365

Simple interest S=A+I = A*(1+d/365*i) S=A+I = A*(1+n*i) 1 year n=1, d=365. d=90 n=90/36
A=S/(1+d/365*i) A=S/(1+n*i) 3 year n= 3 d= 365x3=1095
Find A Purchase price
Face value (FV ) or S $ 100,000.00 S $ 150,000.00
Number of days to maturity d 180 n 3 years
YTM = i simple interest rate p.a 7.85% i 9% jan 31
PV =A = purchase price=
S/(1+d/365*i) =
$96,273.05 A= $ 118,110.24 feb 28
mar 31
Find I and S (interest and Future value) apr 30
A (present value) $ 10,000.00 A $ 100.00 may 31
d 90 n 3 jun 30
i 8% 12% jul 31
Interest amount I = 197.26 I= $ 36.00 aug 31
S=A+I = $ 10,197.26 S= $ 136.00 sep 30
S=A*(1+d/365*i) = $ 10,197.26 S= $ 136.00 oct 31
nov 30
i= 365/d *I/A i= 12/d *I/A
Find i YTM rate of return dec 31
A $ 48,090.00 $ 48,090.00 365
S $ 50,000.00 $ 50,000.00
d 182.5 days 6 months
Interest $ 1,910.00 $ 1,910.00
Interest rate 0.0794 7.94% p.a 0.0794 7.94%

Find n n=I/(A*i)
A 4000
S 8000
i 5.20% p.a
I = $ 4,000.00
n = 19.23 years

p.a : per annum , yearly 1st period interest : Principle of deposit (A) * i
interest of period 2nd period interest : Principle of deposit (A) *
six monthly/semiannual : interest rate p.a/2 …..
quartly : interest rate p.a/4 At maturity : Principle + Interest = Principle +
monthly : interest rate p.a/12
90 days : interest rate p.a*90/365
jan-jun : 181 days : interest rate p.a *181/365
july -dec 184 days : interest rate p.a *184.365
 Holding period yield HPY
=1, d=365. d=90 n=90/365 HPY=365/days hold*(sale price-purchase price)/purchase price

= 3 d= 365x3=1095
What is the present value of a money-market discount security?
Price = 365* face value /[365+ (yield/100* day to maturity)]
nhuan:4
31 FV or S $ 100,000.00

29 YTM 7.85% p.a %=yield/100

31 day to maturity 180
30 Purchase price (A)= 96,273.05 S/(1+d/365*i) =365*S/(365+d*i)
31
30 Calculate sale price
31 Yield at sale 7.35% p.a
31 day to maturity 180
30 Days hold 50
31 Days remain =d= 130
30 FV 100,000.00

31 Sale price = 97,448.97 S/(1+d/365*i) =365*S/(365+d*i)

366 Calculate holding period yield
HPY = 0.08917 8.92% p.a

Principle of deposit (A) * interest rate of the period

: Principle of deposit (A) * interest rate of the period

ple + Interest = Principle + Principle * Interest of the period

S = the accumulated amount or future value S = A * (1 + i)^n
A = the present value
i = the current nominal interest rate expressed as a decimal annually S = A * (1 + i/m)^n*m
n = the number of compounding interest periods (year)
m : coumponding period per year

compound interest calculation

A $ 8,000.00 compounded semiannually m= 2
n (years) 4 years compounded quarterly m= 4
m 4 → compounded monthly m= 12
i 0.12 p.a compounded weekly m= 52
FV =S = $ 12,837.65 compounded daily m= 365
compounded annually m=1

S $ 25,000.00
n 7 years
m 12 compounding period per year
i 0.1 p.a
PV=A = $ 12,450.69 ordinary
annuity

a perpetuity : annuity with no end date

PV = D/r
annuity due = ordin
Present value of Annu

Present value of BONDS

ANNUITY the present value of the periodic coupon stream the present value of
A=C*[1-(1+i)^-n]/i

C $ 6.00 9% p.a
ordinary n=#periods 10 #year 5 m 2
annuity
i 0.045
A couponds $ 47.48 A of facevalue =

PV of the bond = PV of periodic coupons+ PV face value A of bond =

Converting nominal rate into effective rate of interest EAR : CONTINUOUS COMPOUNDING : when th
i e : effective rate of interest i : nominal rate of interest per period
m : compounding periods per annum EAR = (e^ quoted annual rate ) -1

ie = (1+i/m)^m-1 Rule 72: (for compound interest

i 0.1 p.a A
 m 12 compounding period per year i
EAR ie = 0.1047 10.47% n =72/8 =
 A = S/ (1 + i)^n ORDINARYANNUITY
A=C*[1-(1+i)^-n]/i
A = S/ (1 + i/m)^n*m
ANNUITY DUE
A={C*[1-(1+i)^-n]/I*}(1+i)

ANNUITY the present value of the periodic coupon stream

periodic cash flows occur at the end of each period, this is known as an ordinary annuity
example : loan repayment at end of each month : ordinary annuity
cash flows occur at the beginning of each period, this is known as an annuity due
example pay insurance policy premium at the start of each year; this is an annuity due.
12% fixed-interest coupon rate :this bond pays a coupon payment of $6 per $100 of face value every six months.
A = the present value C = the
annuity payments (regular cash flows: coupon or interest payment)
i = current nominal interest rate,per period,
expressed as a decimal
n = number of periods
C $ 100.00 600 i 0.071 p.a
n 3 years 12 periods years 1m 12
i 0.12 p.a 0.005917 interest rate per a period =Q13/S14
A $ 240.18 6930.579

annuity due = ordinary annuity *(1+i)

Present value of Annuity due
A (due) 269.01 6971.585
NDS ACCUMULATED VALUE OF AN ANNUITY (FUTURE VALUE
the present value of the face value of the bond S=C * [(1+i)^n-1]/i
A=S/(1+i)^n
C 1,000.00
S $ 100.00 I= 0.0060 0.072 p.a
i 0.045 n=period 48 #years: 4m 12
n 10 S= $ 55,435.00
A of facevalue = $ 64.39
FV in excel $55,435.00
A of bond = $ 111.87

COMPOUNDING : when the time intervals between interest payments are infinitely small,

(e^ quoted annual rate ) -1 e is the number 2.71828,

2: (for compound interest ) double the invesment 72 / interest (without percentage)

4000
8 percentage
9 years
Opportunity cost =
%discount /(100%-%discount) *365/(difference between early and late settleme
1/7 n/30 means discount 1% if pay within 7 days, net 30 day payable within 30 days

1/7 %discount 1% buyer can obtain/borrow funds at an after tax rate less than 16.03% , bu
early settlement 7 buyer has cash surplus but non of the return an after tax rate above 16.0
n/30 late settlement 30
difference b/w early
& late settlement = 23
Opportunity cost = 0.16030 16.03% p.a
ween early and late settlement)

tax rate less than 16.03% , buyer should pay within 7 days
rn an after tax rate above 16.03%, buyer should pay early date
Source of financing
By internal sources, we mean sources that do not require the agreement of anyone beyond the directors and managers of the
of long-term —retained earnings is a major source :(expect return of earning) no issue cost, amount raised certain, no e
choice when gain is realised

Short term : reducing the level of receivables and inventories and increasing payables.: tighter control over accounts rec
payable)
External Sources
LONG-TERM FINANCE : ordinary shares,preference shares, borrowings(protection through the use of loan covenants),fina
(From an investor’s perspective, lending is normally the least risky and ordinary shares the most risky).
Amortisation loan, mortage-borrowing secured on property, loan note,debenture( secured by an asset and evidenced by
note

SHORT-TERM FINANCE bank overdraft,promissory notes callled one name paper or commercial paper (only ‘prime’ organ
promissory notes.),bills of exchange,debt factoring (outsourcing the accounts receivable control),invoice discounting

Cost of promisory note (V-P)/P* 1/(n/365) Cost of bill finance

Interest and non-interest ch
institution that arranges the
to the acceptor.The bank wi
the cost of interest, as well a

V ( face value) $ 100,000.00

P (Principal) $ 99,023.00
n days(issue date to maturity date) 30
Interest rate ( cost of funds obtained) 0.1200 12% p.a

Raising Long-term Equity Finance

AUSTRALIAN SECURITIES EXCHANGE: The ASX acts as an important primary (enable companies to raise new capital)and sec on
initial public offering (IPO) An initial share offering on a public stock exchange.
A company may issue shares in various ways
rights issue An issue of shares for cash to existing shareholders on the basis of the number of shares already held, at a pr
dividend reinvestment plan A plan in which shareholders are permitted to reinvest all or part of their dividend payments
offer for sale An issue of shares that involves a public limited company (or its shareholders) selling the shares to a financial institution
public issue An issue of shares that involves a public limited company making a direct invitation to the public to buy shar
tender issue Shares for sale to investors for which the investors must state the amount they are prepared to pay for the shares.(the
private placing An issue of shares that involves a limited company arranging for the shares to be sold to the clients of particular issui

Factors deciding between long-term and short-term borrowing

Matching : match the type of borrowing with the nature of the assets held.
Flexibility.Short-term borrowing may be useful to postpone making a commitment to a long-term loan, especially if inter
does not usually incur penalties if the business makes an early
repayment
Re-funding risk (for shorterm loan : problems for a business in financial difficulties or if there is a shortage of funds availa
Interest rates: Interest payable on long-term debt is often higher than for short-term debt because lenders require a high
directors and managers of the business
t, amount raised certain, no effect on control of the control by the existing SH, SH has

ter control over accounts receivable; Reduced inventory levels Delayed payment to suppliers (accounts

he use of loan covenants),finance leases,securitisation of assets.

most risky).
by an asset and evidenced by a trust deed-BONDs,eurobonds issued by listed companies,convertible loan

rcial paper (only ‘prime’ organisations have a credit rating high enough to issue
ntrol),invoice discounting

Cost of bill finance

Interest and non-interest charge ( establishment or facility fees payable to the bank or other
institution that arranges the issue, as well as ongoing maintenance or activity fees, acceptance fee payable
to the acceptor.The bank will arrange for a discounter and will pass on
the cost of interest, as well as other charges such as the accommodation fee, to the drawer

o raise new capital)and sec ondary market(enable investors to transfer their securities) in capital for compani

of shares already held, at a price that is usually lower than the current market price
rt of their dividend payments in new shares
he shares to a financial institution(known as issueing house) that will, in turn, sell the shares to the public.
tion to the public to buy shares in the company
pared to pay for the shares.(the investors determining the price at which the shares will be issued)
d to the clients of particular issuing houses or stockbrokers, rather than to the general investing public (selected investors, such as large financial institu

g-term loan, especially if interest rates are high but are forecast to fall in the future. Short-term borrowing

e is a shortage of funds available for lending)

because lenders require a higher return when their funds are locked up for a long period
ors, such as large financial institutions.
The Valuation Principle tells us that the value of the firm is the present value of its free cash flows. Therefore, working capit
operating cycle is the average length of time between when the firm originally purchases its inventory and when it receives th
cash cycle is the length of time between when the firm pays cash to purchase its initial inventory and when it receives cash fro
negative cash cycle; they are paid for the product before they have to pay for the cost of producing it
The longer a firm’s cash cycle, the more working capital it has, and the more cash it needs to carry to conduct its daily operatio
COGS 40,653.50 Revenue (Sale)
Daily COGS (COGS/365) 111.38 Daily Sale (Sale/365)
Inventory 3,698.30 AR
Inventory days (Inventory /daily COGS) 33.20 AR days (AR/daily Sale)
AP 5,124.60
AP days (AP/daily COGS) 46.01
CCC (Inventory days+ AR days -AP days) (11.36) negative CCC: it generally r
offers little credit to custom
Free cash flow FCF Current Plan Plan : depreciation and capital expenditure off se
Net profit (NI) 20000 20000 NI and WC increase 4% per year , cost of capital
Plus depreciation 5000 5000 If reduce annual increase in WC by 20%, what w
Less Capital expenditure -5000 -5000
Although the change will not affect co
cash flow available to shareholders an
Less increase in WC -1000 -800
FCF 19000 19200

PV FCF/(r-g) 237,500.00 240,000.00

Cost of Trade credit 2/10 n 30 EAR = (1+r)^(365/m)-1

Sale 100 pay full if pay at 30 day
2% 98 dicsount 2% (2/10) if pay at 10 day
Interest for 20 days 2 days for interest (30-10) m 20
Interest rate for 20 days r 0.0204 2.04% r
EAR 0.445853 44.59% p.a

Collection float :The amount of time it takes for a firm to be able to use funds after a customer has paid for its goods
Mailing float (buyer mails to cheque and company received cheque) 2
Processing float (company processes chequeand deposit cheque to bank) 3
Avaiablity float ( bank processes cheque) 2
Collection float = Mailing float+ Processing float+ Availablity float 7

disbursement float :amount of time it takes before payments to suppliers actually result in a cash outflow

Receivables Management credit standard (5Cs of credit) , credit term , collection policy
now 30 days now 30 days
production(pcs) 500 480 reduce sale 20 pcs
variable cost per unit -60 -15000 -15000 -60 0 -28800
unit price 100 100
Sale at full price 50% 25000 100% 48000
Sales at discount 50% 24750 0% 0
discount 1% 1%
unit price with discount 99 99
 9750 10000 0 19200
NPV 19,650.99 19,009.90

NO switch to new plan, you will lose too many customers, even though your remaining customers will be paying the full price. NPV helps us

Ageing schedule
a) Number of accounts : Days outstanding Number of accounts Percentage of accounts (%)
(b) Dollar amounts outstanding Days outstanding Amount outstanding ($) Percentage outstanding (%
term : 2/15 net30 term 3/10 net 30
Days outstanding # of acct %of acct amount outst. % outstanding Days outstanding
1-15 220 38.6% $ 530,000.00 33.1% 1-10
16-30 190 33.3% $ 450,000.00 28.1% 11-30
31-45 80 14.0% $ 350,000.00 21.9% 31-40
46-60 60 10.5% $ 200,000.00 12.5% 41-50
>60 20 3.5% $ 70,000.00 4.4% 51-60
total 570 100.0% $ 1,600,000.00 100.0% >60
late paymt >30days 160 28.1% $ 620,000.00 38.8% total
28% of the firm’s credit customers (and 39% by dollar amounts) are paying late. late paymt >40days

Accounts payable management

supplier term : 2/15 net 40
AP 250000
daily COGS 14000
AP days 17.86
The firm is not managing its accounts payable well
Paying on the 18th day not only misses the discount, but costs the firm 22 days (40–18) use of its cash.

stretching the accounts payable : ignore the payment due period and pay the amount owed late.Doing so reduces the direc

Cost of Trade credit with stretch AP 1/15 net 40 stretch 60 days EAR = (1+r)^(365/m)-1
Sale 100 pay full if pay at 30 day
1% 99 dicsount 1% (1/15) if pay at 15 day
Interest for m days 1 days for interest (60-15) m= 45
Interest rate for m days r 0.0101 1.01% r
EAR 0.084934 8.49% p.a

By stretching its payables, the firm reduces its effective cost of credit EAR . However, if the firm pays later than the contracted

Inventory Management
BENEFITS OF HOLDING INVENTORY: holds too little inventory, stock-outs,: lost sales. Disappointed customers may switch to on
customer purchases do not perfectly match the most efficient production cycle : A firm must weigh the costs of the inventory
production against the benefits of more efficient production

If it produces its toys at a constant rate, its inventory levels will increase to very high levels by August : high cost of inventory
a seasonal manufacturing strategy : inventory would not accumulate, freeing up cash flow from working capital and reducing t
seasonal manufacturing incurs additional costs, such as increased wear and tear on the manufacturing equipment during pea

COSTS OF HOLDING INVENTORy

acquisition costs are the costs of the inventory itself over the period being analysed (usually one year);
order costs are the total costs of placing an order over the period being analysed
carrying costs include storage costs, insurance, taxes, spoilage, obsolescence and the opportunity cost of the funds tied up in t

Minimising these total costs involves some trade-offs.

the lower the level of inventory a firm carries, the lower its carrying cost, but the higher its annual order costs
reduce their carrying costs as much as possible. With ‘just-in-time’ (JIT) inventory management,
a firm acquires inventory precisely when needed so that its inventory balance is always zero,

Cash Managemen
3 reasons for holds cash: • to meet its day-to-day needs; • to compensate for the uncertainty associated with its cash flows; •
transactions balance The amount of cash a firm needs to be able to pay its bills.
precautionary balance The amount of cash a firm holds to counter the uncertainty surrounding its future cash needs.
compensating balance An amount a firm’s bank may require the firm to maintain in an account at the bank as compensation f
ws. Therefore, working capital alters a firm’s value by affecting its free cash flows
tory and when it receives the cash back from selling its product
and when it receives cash from the sale of the output produced from that inventory

to conduct its daily operations

55,129.80
(Sale/365) 151.04
218.00
AR/daily Sale) 1.44

negative CCC: it generally receives cash from its sales 11.36 days before it pays its suppliers for the products it sells/inventory
offers little credit to customers, manages its inventory very well, and is able to secure strong credit term with its the suppliers
nd capital expenditure off set each other
4% per year , cost of capital 12% r 12% g 4%
crease in WC by 20%, what would effect the company value 20%

the change will not affect company’s earnings (net profit), it will increase the free
available to shareholders and increase the value of the firm by 240000-237500 = 2500

using compounding EAR !

pay full at 30 day , you need find a bank that would lend you the $98 at a lower rate than EAR 44.59%

s paid for its goods

reduce sale 20 pcs

ying the full price. NPV helps us weigh this trade-off—the PV of the costs outweighs PV of the benefits

%)
e outstanding (%
term 3/10 net 30
Days outstanding $ outstanding %
$ 100,000.00 18.8%
$ 300,000.00 56.4%
$ 100,000.00 18.8%
$ 20,000.00 3.8%
$ 10,000.00 1.9%
$ 2,000.00 0.4%
$ 532,000.00 100.0%
late paymt >40days $ 32,000.00 6.0%

e.Doing so reduces the direct cost of trade credit

Cost of Trade credit

Sale 100
1% 99
Interest for m days 1 m ( 40-15)= 25
Interest rate for m day 0.0101 1.01%
EAR 0.1580 15.80%

ys later than the contracted date, it may jeopardise future credit with its supplier

customers may switch to one of the firm’s competitors

h the costs of the inventory buildup under constant

ust : high cost of inventory

orking capital and reducing the costs of inventory
uring equipment during peak demand and the need to hire and train seasonal workers
cost of the funds tied up in the inventory.

order costs

ociated with its cash flows; • to satisfy bank requirements

future cash needs.

the bank as compensation for services the bank may perform.
ucts it sells/inventory
with its the suppliers
 A = the present value C = the annuity
payments (regular cash flows: coupon or interest payment)
i = current nominal interest rate,per period, expressed as a decimal
n = number of periods

C $ 100.00 $ 600.00 i 6.60% p.a

ordinary n 3 years 12 periods years 1 m
annuity i 0.12 p.a 0.0055 interest rate per a period
A (PVA) $ 240.18 $ 6,949.07
Using excel function PV $240.18
using excel function (oridinary annuity)
annuity due = ordinary annuity *(1+i) C $ 3,041.46 NPER
n 60 Rate
A (PVAdue) 269.01 6987.2926 i 0.667% PV
A (PVA) $ 150,000.00 PMT
lay so lieu va ket qua PV tu ban using excel function (ordinary annuity)
Delayed Annuity rate per period 0.667% Growing Annuity
Annuity beginning at date 2 C $ 80,000.00
So we calculate PVA at date (less1) 1 PVA $150,000.04 g 9%
So discounting the PVA at date 1 to date 0 1+g 109%
PVA at date 0 $ 149,006.66 r 20%
1+r 120%
n 40
PVAg $ 711,730.71
Perpetuity
C $ 100.00
rate per period 0.08
Loan and equal periodic installment
PV=C/r $ 1,250.00
A (loan amount=PV) $ 21,500.00
Growing Perpetuity n( number of loan installment) 84
C $ 100,000.00 i (nominal rate per period) 1.00%
rate per period 0.11 R (installment amount at end of each month) 379.53
g 0.05 R= A/(1-(1+i)^-n)/i
PV=C/(r-g) $ 1,666,666.67 R (installment amount at BEGIN of each month) 375.78
R= A/(1-(1+i)^-n)/(i*(1+i))

using excel function (oridinary annuity)

C 3041.46 NPER 60
n 60 Rate 0.667% →
i 0.667% PV $150,000.0
A (PVA) 150000 PMT $3,041.46
FV $223,476.92
 ACCUMULATED VALUE OF AN ANNUITY (FUTURE VALUE
S (FVA) S=C * [(1+i)^n-1]/i

C $ 200.00
i 0.0050 0.06 p.a
12 n 36 year: 3 m: 12
FVA S 7,867.22

FVA (due) =FVA*(1+i) 7906.56

ridinary annuity)
60 periodic cash flows occurs at the end of each period: an ordinary annuity
0.667% cash flows occur at the beginning of each period, annuity due
$150,000.04 FVAdue>FVAordi :each pmt occurs one period earlier with annuity due so pmt will earn interest for one additional period
$3,041.46 PVAdue>PVA ordi :each pmt is discounted back one less period

Balloon payment
5year-balloon with 20 year armortisation
means make monthly payment basing on 20- year armortisation
but after 60 month (5 years) borrower will make single "balloon payment

PV (loan 100,000.00
APR 12% 5 year bal 60 months
years 20
m 12 (pay monthly
rate pe 0.01
payable n 240
monthly PMT $1,101.09
amorti. Years m outstanding loan after 60 months (5 years)
7 12 PV of remaining pyment 180 months (240-60)
12% p.a BALLOON $91,744.33
( oridnary Annuity)

(due Annutity)

annuity due
PVA due =PVA*(1+i) $ 151,000.04
FV due =FVA*(1+i) $ 224,966.77
PMT due=PMT/(1+i) $ 3,021.32
n interest for one additional period
 base/term bid-offer
DIRECT QUOTE 1st currency or lefft CCY: USD USD/JPY 82.58–82.66
INDIRECT QUOTE 2nd currency or right CCY : USD GBP/USD

USD/EUR : price of USD1 in term EUR AUD/USD0.7630–40 The Aussie dollar spot is seventy-six t
GBP/USD price of GBP1 in term USD AUD/SGD1.2760–1.2770 Aussie Sing dollar spot is one twenty-
EUR/AUD1.3755–(1.37)65 euro Aussie spot is one thirty-seven fi
EUR/AUD1.3755–1.3765 euro Aussie spot is one thirty-seven fi
USD/JPY82.58–82.66 Dollar yen spot is eighty-two fifty-eigh
Spot and forward rate AUD/ USD0.7647–50, 28–32 The Aussie dollar is seventy-six forty s
EUR/AUD1.3755–1.3765 the price-maker FX dealer will buy EUR1 for AUD1.3755. From the price-taker’s point of view
FX maker = FX Dealer the price-maker FX dealer will sell EUR1 for AUD1.3765. From the price-taker’s point of view
Bid price the price at which an FX dealer will Buy the base currency
Offer price or ASK Price the price at which an FX dealer will sell the base currency

Spread : Offer price- Bid price 65-55=10 points (EUR/AUD1.3755–1.3765) spread is 3 points (AUD/GB
Percentage spread= (offer price-bid price)/bid price*100 BID 1.3755 OFFER 1.3765

TRANSPOSING SPOT QUOTATION CROSSING 2 DIRECT FX QUOTATION

bid offer
EUR/AUD 1.3755 1.3765 USD/EUR 0.7250 0.7255
AUD/EUR 0.7265 0.7270 USD/JPY 81.40 81.50
EUR/JPY 112.20 112.41

CROSSING DIRECT & INDIRECT FX QUOTATION CROSSING 2 INDIRECT FX QUOTATIO

GBP/USD 1.6270 1.6275 nhap Indirect quote AUD/USD 0.7262

USD/NZD 1.3292 1.3297 nhap direct quote GBP/USD 1.3270
base CCY of indirect
thanh base CCY
GBP/NZD 2.1626 2.1641 can tim AUD/GBP 0.5470
if the question ask other way NZD/GBP then do transposing
NZD/GBP 0.4621 0.4624

Forward points e
Interest rate parity principle that exchange rates will adjust to reflect interest rate differentials between countries
firm has a USD payable in six months’ time and that the firm is concerned that the AUD is going to depreciate relative to the U
date, and telephones an FX dealer with the following request: ‘What is the AUD/USD spot and six-months forward? (asked for

FX dealer response :The Aussie dollar is seventy-six thirty–forty, thirty-two–twenty-seven’ 32 and 27: are the six-month for
rate . if the points are falling (going from larger to smaller), subtract them from the spot rate.

Example Spot AUD/USD 0.7630 0.7640

Forward point 0.0032 0.0027 falling> base currency : forward discount
Forrward AUD/USD 0.7598 0.7613 substract
CALCULATE FORWARD POINT
S = spot rate Spot USD/CHF 1.1560
It = interest rate of terms currency p.a 4% Forward day 90
Ib = interest rate of base currency p.a 3% Forward point 0.0029
Ib<It ADD ADD if Ib< It
Forward USD/CHF 1.1589
It = interest rate of terms currency p.a 3% Spot USD/CHF 1.1560
Ib = interest rate of base currency p.a 4% Forward day 90
Ib>It substract Forward point -0.0029
SUBSTRACT if Ib>It 1.1531

FX dealer for delivery of USD1 million in three months. ( sell USD 1 mio to swiss company )
Today: FX dealer
1. Buy USD1 million at the spot rate of 1.1560 (cost: CHF1 156 000).
2. Borrow CHF1 156 000 for three months at 4.00 per cent per annum (amount due: CHF1 167560)
3 Invest the USD1 million in a three-month euro-deposit at 3.00 per cent per annum (at maturity: USD1 007 500)
4 The forward exchange rate = 1167560/1 007500 = 1.1589 (29 forward points)
In three months’ time:
5 FX dealer :Repay CHF borrowing.
6 FX dealer delivers USD.
7 Company makes CHF payment to the FX dealer based on the USD/CHF1.1589 forward exchange rate

CALCULATE BID AND OFFER FORWARD POINT

Bid forward point = Sbid*((1+Itbid*fwd days/days in year)/(1+Iboffer*fwd days/days in year)-1)
Offer forward point = Soffer*((1+Itoffer*fwd days/days in year)/(1+Ib bid*fwd days/days in year)-1)
bid offer
S spot rate USD/CHF 1.1555 1.1560 fwd days 90
It (term CCY) p.a 3.70% 4.00% days in year 360
Ib (baseCCY) p.a 3.00% 3.30%
Bid forward point 0.0011 ie 11 point
Offer Forward point 0.0029 ie 29 point
ADD since Ib<It
Forward USD/CHF 1.1566 1.1589
 1st currency : Base currency , 2nd currency : term currency
fewer than 10 unit of term currency : 4 decimal : AUD/USD0.7554-0.7559
more than 10 unit of term currency : 2 decimal : AUD/JPY83.43-83.49
point : final decimal place in FX quotation :
e dollar spot is seventy-six thirty–forty
g dollar spot is one twenty-seven sixty–seventy
ie spot is one thirty-seven fifty-five–sixty-five
ie spot is one thirty-seven fifty-five–sixty-five
n spot is eighty-two fifty-eight–sixty-six’
e dollar is seventy-six forty seven–fifty, twenty eight-thirty two
e price-taker’s point of view, it would sell EUR1 and receive AUD1.3755 from the FX dealer
e price-taker’s point of view, it receives EUR1 on payment of AUD1.3765 to the FX dealer

the base currency

spread is 3 points (AUD/GBP0.6250–53)

Percentage spread 0.07%

NHAP RATE CUA TERM CCY SE TRO THANH BASE CURRENCY (EUR)

G 2 INDIRECT FX QUOTATION

0.7269 base CCY of indirect thanh base currency can tim

1.3275

0.5478

tween countries
depreciate relative to the USD. The firm decides to enter a forward exchange contract today, with a six-month delivery
months forward? (asked for an indirect quote : AUD is the base currency.)

nd 27: are the six-month forward points. if the points are rising (going from smaller to larger), add them to the spot

Spot AUD/USD 0.7630 0.7640

Forward point 0.0015 0.0017 rising > base currency is at a forward premium
Forrward AUD/USD 0.7645 0.7657 add
 convert interest rate for comparable
USA, Japan and Europe : 360 days
Days in year 360 Commonwealth countries( UK, Australia, New Zealand): 365 days
ie 29 point
NZD (365) 7% NZD (360) 6.9041%
OR
JPY (360) 2% JPY (365) 2.0278%
Days in year 360

Ib 3%< It 4% Ib 4%>It 3%
HF1 167560) 1,167,560.00 1.1589 1,164,670.00 1.1531
maturity: USD1 007 500) 1,007,500.00 1,010,000.00

exchange rate
 Yield = quoted
Yield = 100- Quoted (3 decimals) 7.250 % 100 92.750
7.500 % 100 92.500
Price of Bond Future contract
Price of Bonds = C*(1-(1+i)^-n)/I + A*(1+i)^-n = C (coupond)= yield per period= n (# period)=
$ 91,216.88 $ 3,000.00 0.03625 20
$ 89,577.85 $ 3,000.00 0.03750 20

Sell price > Buy price : profit Sell price <Buy price : Loss

1) Hedging of Borrowing Cost

Physical market Future contract mar
Today Today
XYZ expect to borrow in 3 months (A) $ 1,000,000.00 SELL one (=A =$1mio) 90 day-bank bill at
Current interest rate p.a 8.00% Yield =
Forcast : interest rate RISE Value of contract (price of bond)
P=365*face value /(365+yield*d) =

In three months In three months

XYZ issues $1mio bank bill $ 1,000,000.00 BUY one bank bill at
Market yield 9.00% Yield =
Value of contract (price of bond) Value of contract (price of bond)
P=365*face value /(365+yield*d) $ 978,290.00 P=365*face value /(365+yield*d) =
=
SELL PRICE-BUY PRICE= PROFIT(LOSS)=
Future contact profit offset additional borrowing cost

Discount amount = Face value - discounted value of bill (physical market) = $ 21,710.00
Net cost of funds = Discount amount - Future contract profit = $ 20,528.65
Total funds available = Discounted value (price) of bill +future contract profit = $ 979,471.35
Effective cost of funds = Net cost of funds /total funds available*365/d = 8.50%

2) Hedging of Yield of funds

Physical market Future contract mar
Today Today
ABC expect to invest
(buy) bonds in 3 months
$ (A)2,000,000.00 BUY 20 three-year Treasury bond contracts at
Current interest rate p.a 7.00% Yield =
Forcast : interest rate FALL ie increasing purchase price of bond Value of 1 contract (price of bond)
C*(1-(1+i)^-n)/I + A*(1+i)^-n =
Value of 20 contracts =
In three months In three monht
ABC buy bonds $ 2,000,000.00 yield period SELL 20 three-year Treasury bond contracts at
Market yield 6.84% 3.42% Yield =
Value of 1 bond Value of 1 contract (price of bond)
C*(1-(1+i)^-n)/I + A*(1+i)^-n = $ 97,756 C*(1-(1+i)^-n)/I + A*(1+i)^-n =
Value of 1 bond Value of 1 contract (price of bond)
C*(1-(1+i)^-n)/I + A*(1+i)^-n = $ 97,756 C*(1-(1+i)^-n)/I + A*(1+i)^-n =
Value of 20 bonds = $ 1,955,122 Value of 20 contacts =
SELL PRICE-BUY PRICE= PROFIT(LOSS)=
Profit from futures offset the increased purchase price resulting from the yield decline
Effective yield = buy yield -sell yield +market yield = 7.14% p.a

3) Hedging a Foreign Currency Transaction

Spot market Future contact mark
Today Today
Austr.Importer buy goods at and pay in 3 month 85,000.00 USD SELL one future contact at
Spot AUD/USD 0.7300 Face value of the contract
AUD amount needed for …USD= 116,438.36 AUD Value of the contact

In three months :Austr.Importer In three monht

Spot AUD/USD 0.7090 BUY 1 contact at
buy USD 85,000.00 USD
Value of the contact
Sell AUD =
119,887.17 AUD
NET COST =E66-L69 117,771.51 AUD
SELL PRICE-BUY PRICE= PROFIT(LOSS)=

4) HEDGING THE VALUE OF SHARE PORTFOLIO

Physical market Future contract mar
Today Today
A funds has a diversified portfolio value $ 30,000,000.00 SELL 293 ASX200 index future contracts at
ASX200 currently 7300 Dollar value of 1 ASX200 Index future contact
Forcast : FALL $25*physical market index = 25*J76
# Future contact to hedge the portfolio
Portfoliovalue/ dollar value of 1 index fut.contr.
E76/J77
Contract value

In four months In four months

ASX200 6650
Fall = 8.90%
Value of the Portfolio now =
$ 27,328,767
Loss on Portfolio without future
contract E76-E86 $ 2,671,232.88
Net LOSS(PROFIT) = E88-J89 $ 6,232.88
Value of Portfolio with
future contracts =E86+J89
BUY 293 ASX200 future contracts at
Dollar value of 1 ASX200 Index future contact
$25*physical market index = 25*J84
Contract value =
GAIN (LOSS) on futures= J81-J88
$ 29,993,767.12 VALUE OF PORTFOLIO INCLUDING
FUTURE CONTRACTS FOLLOWING THE C
 A % per annumfixed interest coupon bonds half yearly coupon yield # years
$ 100,000.00 6% 2 7.25% 10
$ 100,000.00 7.50%

Future contract market

io) 90 day-bank bill at 91.500 d (day to maturity 90

8.50%
price of bond)
/(365+yield*d) = $ 979,471.35

91.000
9.00%
price of bond)
/(365+yield*d) = $ 978,290.00

RICE= PROFIT(LOSS)= $ 1,181.35 possitive : profit, negative : loss

$ 21,710.00
$ 20,528.65
$ 979,471.35
8.50%

Future contract market Treasury bond $ 100,000.00 6% p.a fixed interest coupon
Coupond = $ 3,000.00 2 semi annual
Treasury bond contracts at 93.500 n 6 3 years
6.50% yield per period 3.25%
t (price of bond)
A*(1+i)^-n = $ 98,656.85 # future contracts 20
$ 1,973,137

r Treasury bond contracts at 93.200

6.80% yield per period 3.40%
t (price of bond)
A*(1+i)^-n = $ 97,861.56
t (price of bond)
A*(1+i)^-n = $ 97,861.56
$ 1,957,231
RICE= PROFIT(LOSS)= $ (15,906) possitive : profit, negative : loss

Future contact market

0.7250
100,000.00 AUD
ct
72,500.00 USD

0.7100 close out future contact

ct
71,000.00 USD

RICE= PROFIT(LOSS)= 1,500.00 USD 2,115.66 AUD

(=J69/E64) convert profit (loss)in USD to AUD

Future contract market

ndex future contracts at 7300

SX200 Index future contact
et index = 25*J76 $ 182,500.00
o hedge the portfolio 164.38356 nhap so hop dong vao o J79 sau khi co ket qua o K78
ar value of 1 index fut.contr. 164
6/J77
$ 29,930,000.00

uture contracts at 6650

SX200 Index future contact

et index = 25*J84 $ 166,250.00
$ 27,265,000.00
tures= J81-J88 $ 2,665,000.00

VALUE OF PORTFOLIO INCLUDING GAIN FROM

FUTURE CONTRACTS FOLLOWING THE CHANGE IN asx200
 USING FRA FOR BORROWING HEDGE FRA : flexible , negotiable, no margin payment
Settlement amount = FRA settlement rate - FRA agreed rate FRA dealer quote
365*P/(365+D*is) - 365*P/(365+D*ic) six month period from
P the FRAnotional principle amount $ 5,000,000.00 19/9 this year rate 0.1
D number of days in contract period 183 19/4 next year referen
is reference rate at FRA settlement date, in decimal 0.1395 19/9 this year : FRA ag
ic FIXED FRA agreed rate , in decimal 0.1325 19/4 next year : settlem
contract period : 6 mon
SETTLEMENT AMOUNT = (15,379.19)

interest rise over the period , the settment of 15379.19 is paid by FRA dealer to the company i.e Company receives compens
interest fall , company compensate /pay settlement to FRA dealer

OPTION Option can be exercised only on expiration date (European) , any time up to expiration date (American)
Call Option :Buyer (holder) : Right to BUY -> Long Call Seller (writter) : Short call
Buyer exercise Call option : S (Spot price) > X (exercise price)
Value of Call option to the BUYER (long call) V=max (S-X,0)-P
Value of Call Option to the SELLER (short call) V=P-max(S-X,0)

Profit and Loss of Call Option Exercise price (X) $ 12.00 Premium(P) $ 1.50
Spot price (S) Value of LONG call Exercise Long call (S>X) ? Value of SHORT call
10 $ (1.50) No $ 1.50
11 $ (1.50) No $ 1.50
12 $ (1.50) Indiferrent $ 1.50
13 $ (0.50) Yes $ 0.50
14 $ 0.50 Yes $ (0.50)
14.5 $ 1.00 Yes $ (1.00)
15 $ 1.50 Yes $ (1.50)
16 $ 2.50 yes $ (2.50)
17 $ 3.50 yes $ (3.50)

Buyer : Limited loss , max loss = premium

Seller : Unlimited loss

Covered Call Option : Writter owns sufficient of underlying assets of Call option excercised
Must sell if Buyer exercise the option to buy. X1
OR Take other Call option as Buyer of the same underlying assets with
lower exercise price X2 (X2<X1) X2 : Buy X1 Sell

Vanila Swap

Principle $ 22,000,000.00
 Fixed interest rate 7.60% Variable Interest rate >
Variable Interest rate 7.75% Variable Interest rate <
Difference Variable interest-fixed interest 0.15%
Coupon period ( Annually) --> Interest $ 33,000.00 Bank pays Company P
Coupond period ( half year) P* difference of rate /2-> interest $ 16,500.00
margin payment nhuan:4
FRA dealer quote 7Mv13M (19) 13.25 to 20 jan 31 31
six month period from 19 Apr to 19 oct next year: 183 days feb 28 29
19/9 this year rate 0.1325 mar 31 31
19/4 next year reference rate BBSW : 0.1395 11 apr 30 30
19/9 this year : FRA agreed date may 31 31
19/4 next year : settlement date of FRA jun 30 30
contract period : 6 months(19/4 next year to 19/10 next year) jul 31 31
aug 31 31
sep 30 30
pany receives compensate from FRA dealer 19 oct 31 31
nov 30 30
dec 31 31
365 366

PUT Option :Buyer (holder) : Right to SELL -> Long Call Seller (writter) : Short call
Buyer exercise PUT option : S (Spot price) < X (exercise price)
Value of PUT option to the BUYER (long call) V=max (X-S,0)-P
Value of PUT Option to the SELLER (short call) V=P-max(X-S,0)

Profit and Loss of PUTOption Exercise price (X) $ 12.00 Premium(P) $ 1.50
Spot price (S) Value of LONG call Exercise Long call (S<X) ?Value of SHORT call
9 $ 1.50 Yes $ (1.50)
10 $ 0.50 Yes $ (0.50)
10.5 $ - Yes $ -
11 $ (0.50) Yes $ 0.50
12 $ (1.50) Indiferrent $ 1.50
13 $ (1.50) No $ 1.50
14 $ (1.50) No $ 1.50
15 $ (1.50) No $ 1.50
16 $ (1.50) No $ 1.50

Buyer : Limited loss , max loss = premium

Seller : Unlimited loss

Covered PUT option : the writter hold other PUT option on the same asset as Holder
with higher exercise price (X2) (X2>X1) X2 : sell, X1 Buy
Variable Interest rate > Fixed interest rate : Bank pay company the cash paymen of the differnce
Variable Interest rate < Fixed interest rate : Company pay bank the cash paymen of the differnce

Bank pays Company PE $33000 = Company pay Bank -$33000 = Company receives $33000 from Bank