[Varun.J.Thakkar]

I’m also stuck at this
I read the previous forums too..
Could you please assist with this sir

[Varun.J.Thakkar]

Thanks a lot for solving all queries sir.
Really appreciate it 🙂

[Varun.J.Thakkar]

What about my query for synergies (1) sir?
Kindly tell

[Varun.J.Thakkar]

In Part A for Fondir Co (Dec 2022), they are saying that $ production costs are more than production costs in Euro and so it would be recommended that products are produced in Euro to take advantage of cheaper costs of production. Can you please tell sir how depreciation of Euro against $ would make producing goods in Euro cheaper?

Kindly answer these questions sir.
Really sorry for the trouble but thought a lot about it.

[Varun.J.Thakkar]

I have another doubt in Q1 Fondir Co ( December 2022 on practice platform)
When calculating net receipt from forward contract, the interest on overdraft is calculated for 4months. Is it because it is assumed that the receipt in four months will be used to pay the overdraft?

[Varun.J.Thakkar]

1. Yes I agree. But it doesn’t say that there will be no synergies from year 5 onwards
“It is expected that the acquisition will create after-tax synergies worth $9·2m per year in each of the first four years.” Information for investment in assets and PBIT is given in a similar fashion in the scenario( for the first 4 years). By this logic, investment in assets and other cash flows should also not be growing in perpetuity.

“From year five onwards, the company’s free cash flows are expected to grow annually by 3% for the foreseeable future.” Isn’t this a general statement which would apply to all cash flows including the synergies?

2. Thank you for confirming 🙂

[Varun.J.Thakkar]

Thank you sir 🙂

[Varun.J.Thakkar]

Yes I understand why they have chosen those exercise prices.
I just hope those 2 statements makes sense now sir? (Not learning rules, but just wanted to know I’m concluding it right)

[Varun.J.Thakkar]

Thanks a lot sir 🙂

[Varun.J.Thakkar]

Oh..So this is scarying me a little bit now 🙁
Sorry sir I dont understand how you derived 96 for (1).

I’m giving you the references to both statements which I tried to justify. Since both are old questions, I’ll give you the facts and copy the relevant extract
(1) FNDC plc (Dec 06)
Facts- Company can borrow at L+ 1.25%
Question asked- Calculate the outcome of a collar hedge which would limit the maximum interest rate to 5.75%, and the minimum to 5.25%.
(These interest rates do not include any option premium.)
Extract from the solution- A maximum interest rate to the company of 5.75% implies a LIBOR rate of 4.5%, or 9550. A minimum rate of 5.25% implies LIBOR of 4.0% or 9600.

(2) Interest rate Hedges (June 05)
Facts- Company can invest at L +0.6% , Today is 1 June, spot rate =4%, Invest on 31 Oct, Dec futures= 96.6
Extract from the solution- The expected LIBOR lock-in rate is = 100 – (96.60 – 0.171) = 3.571%
The company will invest in commercial paper at LIBOR + 0.60%. The overall expected
lock-in rate is 4.171%.

On the basis of these two sums, I asked you whether I was correct with those 2 statements…Is it somewhere I’m going wrong?
Thank you for the assistance

[Varun.J.Thakkar]

So sir you said “They are hedging $’s”. You concluded that because the OTC options are in Wirtonia $, am I right?
(I know originally we want to hedge the $ receipt, but many a times contract currency differs from currency we are hedging and so asking you this)

Oh one more thing which clicked me.If they are saying “translated at today’s spot rate” ,that definitely means that premium is in $. (So clear in this question)
But what if that wasn’t written how would I able to identify

I hope you understood what I’m confused with
Sorry to make it a little lengthy

[Varun.J.Thakkar]

Sir in Buryecs Co (MJ17), how can I identify that the premium currency was in Wirtonia $ ?
There was only mention of the contract currency

[Varun.J.Thakkar]

One more question (related to hedging)
If the currency options are in $ for example, then the premium will always be in $ ( the premium currency will always be the contract currency) Am I right?
And if we were outside US, then they would be translated at the spot rate

[Varun.J.Thakkar]

Clear sir..Thank you 🙂

[Varun.J.Thakkar]

Thank you sir 🙂

[Varun.J.Thakkar]

I saw the notes but didn’t find a numerical example of option to switch/ deploy
I know that for an option to Abandon, Pe= Salvage value of asset when we are exercising the option and Pa would be cash flows foregone

I have 2 questions
(1) I still don’t get the reason WHY option to switch/redeploy would be a put option?(We are not selling the assets right?, we are just switching the use of it, then why a put option)
(2) What would Pa and Pe be in an option to switch/ redeploy ??

Kindly answer these questions. Thanks a lot

[Varun.J.Thakkar]

“Options to switch/redeploy
It may be possible to switch the use of assets should market conditions change. A new plant could be designed with resale and/or other uses in mind, using more general-purpose assets than dedicated to allow easier switching”.
It is in the Kaplan text so was wondering whether it is a call/put option if it comes in the paper. Thank you

[Varun.J.Thakkar]

Thank you sir

[Varun.J.Thakkar]

What about (3) Option to switch/ redeploy?? A call or a put option and why?
Thanks a lot sir for (1) and (2)

[Varun.J.Thakkar]

Oh got it.. However it is quite difficult to interpret such things under time pressure…Would I lose a lot of marks for such mistakes??

[Varun.J.Thakkar]

One more question. (Related to real options)
(3) Option to switch/ redeploy would be a call or a put option? I’ve not seen it in past papers anywhere so wondered which option would it be if it comes in the paper..

I guess I found the answer for (2).. Is it because the holder of call option would exercise the option as the share price increases and so we need to close the position by buying call options?

[Varun.J.Thakkar]

Yeah I know..But isn’t this inconsistent as we are using the exchange rate after 1 year..But discounting it with time 0?

[Varun.J.Thakkar]

Oh my…Should have read that…Thanks a lot sir

[Varun.J.Thakkar]

Thanks a lot sir

[Varun.J.Thakkar]

Yeah I definitely agree…So what I conclude
(1) These much questions would be sufficient for both (practical +theory) and is everything which I should focus on for the remaining 2-3 weeks
(2) Better to write something rather than leave it which would make a negative impression to the examiner

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