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1. The mark-to-market value for Drawbridge’s forward position is closest to:
. 1 Drawbridge sold AUD 5 million forward to the settlement date at an all-in forward price of 0.8940 (USD/AUD). 2 To mark the position to market, Drawbridge offsets the forward transaction by buying AUD 5 million three months forward to the settlement date. 3 For the offsetting forward contract, because the AUD is the base currency in the USD/AUD quote, buying AUD forward means paying the offer for both the spot rate and forward points. I. The all-in three-month forward rate is calculated as 0.9066 – 0.00364 = 0.90296 II. This gives a net cash flow on settlement day of 5,000,000 × (0.8940 – 0.90296) = –USD44,800 (This is a cash outflow because Drawbridge sold the AUD for- ward and the AUD appreciated against the USD). 4 To determine the mark-to-market value of the original forward position, calculate the present value of the USD cash outflow using the three-month USD discount rate: –USD44,8000/[1 + 0.0023(90/360)] = –USD44,774. . The present value of the cash flow was not calculated (step 4 of calculation). . The cash flow was calculated using the bid rate instead of the offer rate. 1 The all-in three-month forward rate = 0.9062 – 0.00368 = 0.90252 2 This gives a net cash flow on settlement day of 5,000,000 × (0.8940 – 0.90252) = – USD42,600, and the present value is calculated as –USD42,600/[1 + 0.0023(90/360)] = –USD42,576.
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2. In regard to calculating Wadgett’s FCFF, the comment that is most appropriate is the one dealing with:
. Cash flow from operations (CFO) already reflects changes in working capital items, therefore Paschel’s first comment is correct. EBITDA has the non-cash charges of depreciation and amortization added back, so Covey’s statement is incorrect, not all non-cash charges will need to be added back. Net borrowing is added back for FCFE not FCFF, so Paschel’s second statement is incorrect. . Depreciation has already been added back to EBITDA, though there may be other items that still need to be added back. . Adjusting for net borrowing is not necessary for FCFF (just FCFE).
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3. The best answer to Napier’s question about the effect of Nanuk on Sunjet’s other comprehensive income is that Nanuk’s:
Nanuk is translated under the current rate method, so its translational exposure is its net asset position. The weakening CAD (see Exhibit 2) will generate a re-measurement loss in Sunjet’s other comprehensive income. It is the net asset position that is exposed to exchange fluctuations under the current rate method. Per Exhibit 2, the CAD is depreciating vs. the USD so would generate a loss. Candidates may think the CAD is strengthening. Nanuk’s net monetary liability position would generate a re-measurement gain under the temporal method, but it is the net asset position that is exposed to exchange fluctuations under the current rate method.
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4. Regarding LeCompte’s compensation structure, is Topaz most likely in violation of the CFA Institute Research Objectivity Standards?
Research Objectivity Requirement 5, Research Analyst Compensation, rec- ommends that analysts’ compensation be based on the accuracy of recommendations over time. In addition, compensation should not be directly linked to investment banking or other finance activities, which it is not in this case. LeCompte’s bonus is based on the group’s overall performance and is not specific to the research support she provides to various divisions. The Research Objectivity Standards recommend that analysts’ compensation be based on the accuracy of recommendations over time.
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5. Which comment made by Betta is least likely correct with regard to reduced form models relative to structural models?
. Bett in his comment about the second weakness of reduced form models. It is a weakness of structural models because their credit risk measures are biased because implicit estimation procedures inherit errors in the model’s formulation. because his comment regarding assumptions is correct. because his comment regarding the first weakness is correct.
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