QUESTION
-
- Explain the difference between a put option and a short position in a futures contract.
(b) Explain the difference between a call option and a long position in a futures contract.
- The put option and short position are bearish strategies that are used to speculate the potential decline on the price of an underlying security in the market. The strategies are utilized to hedge against the downside risk of an asset. When an investor wants to buy the right to sell an underlying asset, he or she goes for a put option. When the price of the underlying asset is less than the exercise price, the option is said to be in the money. On the other hand, the short position is used to sell the underlying asset at the futures price. With the short selling strategy, the sale of a security is not owned by the seller but rather borrowed and sold in the market to be bought later. The put option and short sales have a risk to reward ratio not suitable to risk averse investors.
- A call option is a trading strategy that gives the buyer the right but not an obligation to purchase an underlying asset at a predetermined price on a certain date in the future. The holder of the underlying asset is not obligated to purchase the asset. The long position signifies that the buyer owns an asset. The trading strategy is established when an investor buys an asset with a possibility of its rise in the future making gains between the purchase and sell price.
QUESTION 4 ( 9 MARKS )
You should assume that today is 1st January 2009 and that all the following stocks mature on 31st December.
Demonstrate by calculation, using the appropriate formulas, which of the following stocks is the most suitable for;
- a non - taxpayer
- a basic rate taxpayer
- a 40% rate taxpayer
10.5% Treasury 2019/22 @ 108.25
6.75% Treasury 2011/18 @ 86.5
12% Exchequer 2019/23 @ 117.75
Stocks Share price Returns A non tax Payer Basic Tax Payer/20% 40% Tax Payer 10.5% Treasury 2019/22 @ 108.25 108.25 10.50% 11.36625 9.093 6.81975 6.75% Treasury 2011/18 @ 86.5 86.5 6.75% 5.83875 4.671 3.50325 12% Exchequer 2019/23 @ 117.75 117.75 12% 14.13 11.304 8.478 Accumulative Returns 31.335 25.068 18.801 Assuming a basic tax rate of 20%, it is recommendable to invest in a market with no tax since withholding tax reduce the net incomes.
QUESTION 5 ( 4 MARKS )
You have been supplied with details of small investment portfolio, which is shown below. Using the information given in the table, calculate the gross annual income the portfolio would produce and the total value of the portfolio.
Equities Company Number of shares held Share Price (p) Dividend Yield ABC plc 25,000 359 3.25% FGH plc 15,000 259 1.80% XYZ plc 8,000 189 5.26% Fixed Interest Securities Nominal Value Market Price 5% Treasury Bond £200,000 £110.05 4.75 Treasury Stock £750,000 £87.00 Equities Company Number of shares held Share Price (p) Dividend Yield market Capitalization Dividend Yield ABC plc 25,000 359 3.25% 8,975,000.00 291,687.50 FGH plc 15,000 259 1.80% 3,885,000.00 69,930.00 XYZ plc 8,000 189 5.26% 1,512,000.00 79,531.20 Total Dividends 441,148.70 Fixed Interest Securities Nominal Value Market Price Market Value Return 5% Treasury Bond 200,000.00 110.05 22,010,000.00 £ 1,100,500.00 4.75% Treasury Stock 750,000.00 87.00 65,250,000.00 £ 3,099,375.00 Interest Payment £ 4,199,875.00 Gross Income Stocks £ 441,148.70 Bonds £ 4,199,875.00 Total £ 4,641,023.70 QUESTION 6 ( 6 MARKS )
Efficient Market Hypothesis (EMH) is a controversial financial theory.
Explain the three forms of EMH and their significance to an investor.
The Efficient Market Hypothesis commonly short formed as EMH is a financial market theory that argues that stock prices reflect all information in the market. On the notion that the market is efficient, implies that the price at which a particular share trade is reflective of all relevant information. Based on EMH, it is hard for investors to make outsized returns outside the market. The shares trade at their fair value in the securities exchange, making it hard for investors to buy undervalued stocks or sell at inflated prices. Traders can only make extra profits by trading on risky shares in an efficient market.
There are three different versions of EMH. First is the weak form that suggests that today's share prices reflect all historical data, and technical analysis methods cannot be used to make trading decisions. Advocates of this theory argue that if the fundamental analysis is conducted, overvalued or undervalued stocks could be sourced by researching financial statements, thus increasing the chances of making above average returns to that of the market. Second, is the semi-strong form that argues that since all stock price information is made public, investors cannot use either technical or fundamental techniques to gain higher returns in the market. Those who subscribe to this notion believe that only insider information not available to investors may outperform the market. Lastly is the strong form hypothesis that argues that all information public and non-public is fully accounted for in the stock price. Therefore, there are no chances of any investor taking advantage of the market since everyone has all the information available about a share price. The three hypotheses are utilized in the financial markets to explain the movement of stock prices in different securities exchange, and abnormalities are identified.
The Efficient Market Hypothesis is an essential model of explaining the movement of stock prices in different security markets. The theory is used to create a balance within the market and avoid manipulation of share prices. This instils confidence to both buyers and sellers on transparency in trading of a particular stock. Companies, through this theory, also ensure high integrity and accountability in the selling of their shares in exchange. This avoids situations of insider trading where some investors outperform the market. As a relevant theory in economics, it has attracted considerable interest in explaining the demand and supply in the securities market.
QUESTION 7 ( 4 MARKS )
An investor is proposing to invest in an individual Company share and is considering the Companies listed below. Assuming that the average market return is 10% and the return on a short-dated GILT is 3%, calculate the investors required rate of return on each of the Company shares:
Company
Beta
A Plc
0.8
B Plc
1.7
C Plc
0.3
D Plc
2.4
Using CAPM, required rate of return = rf + β(rm – rf ) where (rm-rf) is the risk premium.
Company
Beta
Risk Free Rate
Market return
Risk Premium
Required rate of Return
A Plc
0.8
3%
10%
7%
8.60%
B Plc
1.7
3%
10%
7%
14.90%
C Plc
0.3
3%
10%
7%
5.10%
D Plc
2.4
3%
10%
7%
19.80%
QUESTION 8 ( 4 MARKS )
Using the FCA (Financial Conduct Authority) formula, calculate the maximum Offer price and the minimum Bid price of the units in a fund, given the following information:
Market price of Offer Units £5.25 million
Market price of Bid units £5.0 million
Assumed broker fees (for both bid/offer) 0.25%
Accrued Income 4.25p
Total number of Units in circulation 2,500,000
Initial Charge 7%
Minimum offer price = 5.25 * 1.0025 * 1.07= £5.63
Maximum Bid Price = 5.0 * 1.0025 * (4.25*2500000*0.07) = £5,756,250
QUESTION 9 ( 6 MARKS )
Identify two comparative advantages in investing in each of the following;
- Investment trusts:
- Open-end investment funds:
- Individual stocks and bonds:
- An investment trust is mainly a publicly listed company that is designed to generate profits on behalf of its shareholders by investing in equity or shares in other firms. The shares within the investment are easily traded in the securities exchanges where investors can buy and sell from the market rather that dealing with a fund management firm. Investment trusts have structural advantages that distinguish them from the open-ended funds. Investment trusts tend to supercharge returns and are as well cheaper due to lesser charges. Investment trusts such as REITs also offer higher returns in the market and also attract tax breaks for its investors.
- The open-end investment fund is form of diversified portfolio of pooled investors that offer an unlimited number of shares. The fund manager sells shares to investors which are redeemable. Examples of the open-end fund include the exchange traded fund and the hedge funds. The main advantage of the open-end fund is that it is run by professional portfolio managers that diversify the risk of investment by holding different class of assets. There are lower costs due to pooling of funds from different class of investors. Also, the open-end investment fund issues an unlimited number of shares to its investors. This helps in valuation of the net asset value of its securities and investors can realize potential gains and losses on a daily basis from the open – end fund. The fund is also highly liquid.
- Investment in stocks and bonds gives the best flexibility and liquidity to an investor. Investors within the stock and bond markets can easily track their investments with ease.
Question 10 ( 3 marks )
Explain what is systematic risk and unsystematic risk and which of the two risks can be mitigated by diversification?
Systematic risk is the probability of loss that is associated with the entire market while the unsystematic risk is the probability of loss associated with a given market segment or an industry. The unsystematic risk which is industry related can be eliminated through diversification of the portfolio.
Question 11 ( 2 marks)
The nominal rate of return of an account is 3% and the annual rate of inflation during the same period is 1.1%.
Calculate an accurate measure of the real rate of return.
Real Rate of Return = ( 1 + Nominal Return) / (1 + Inflation Rate) - 1
= ( 1 + 3%) / (1 + 1.1%) - 1
= 1.88%
Question 12 ( 4 marks )
Explain what is the difference between Fundamental analysis and Technical
analysis?
The fundamental and technical analysis are two school of thoughts when it comes to researching and forecasting the future trends of a stock price. Fundamental analysis evaluates the price of a security by attempting to measure its intrinsic value. The approach focuses in studying the economic and financial conditions within the stock spectrum such as earnings, expenses, income, assets, and liabilities as important features of fundamental analysis.
Technical analysis on the other hand pay a close attention on the stock historical patterns that suggest its performance in the future. The approach utilizes charts, patterns, and trends to forecast the price movement of a security.
Question 13 ( 2 Marks )
A company share has a spot price of 200p today and an "over the counter" Forward Contract is to be arranged for the purchase of the company share in 1 year’s time.
Assuming that the applicable rate of interest is 5%, inflation is currently 2.5% and that there is an anticipated dividend of 3p payable within the next year, what would be the likely Forward price of the company share?
The formula for the forward price when the underlying asset pays dividends is as follows; F=(S−D) ×(e^(r×t) )
F= The forward contract price
S= The current spot price = 200p
e=2.7183
r is the risk-free rate of the forward contract = 5%
t is the delivery date which is one year.
D is equal to the sum of dividends present value.
Assuming that the dividend is paid each year the present value of next year dividends is equal to; 3p/(e^(r*t))
= =3p/(e^0.05) (Interest rate = 5%, time period is one year.
=2.853p
Therefore, forward price of share = (200p-2.853p) *(e^(0.05*1))
=197.15*1.0513
Forward contract price = 207.26
Question 14 ( 4 Marks )
Briefly explain the meaning of "behavioural finance", giving two examples.
Behavioural finance is part of the behavioural economics that studies the psychological behaviours of investors. The study focused on the notion that investors are not rational, have limits to their self-control and are influenced by their own biases. The study also analyses the subsequent effects of the market from the behaviour of investors which can either be bullish or bearish. A good example of behavioural finance is where investors result to selling their holdings causing a further decline in the value of a corporation. Due to market information or press release such as lawsuits, investors panic selling their holdings of the company.
Question 15 ( 3 marks )
A UK Fund Manager wishes to stabilise the performance of his equity portfolio which is currently valued at £ 7.3 million, prior to the date of the next quarterly revaluation. The revaluation will be based on the value of the portfolio on 21 May 2016.
The portfolio is made up of 30 shares which are all constituents of the FTSE All Share Index.
Show by calculation what the net value of the fund would be on 21 May 2016, if the fund manager sold all the shares in the portfolio for cash on 21 April 2016.
Assume that today is the 21st April 2016
Assume the cash would have been invested for one month (which can be taken as 30 days)
Assume an annual interest rate of 3% per annum for cash holdings is achievable
Current portfolio value 7.3 million pounds
No of shares = 30 shares
Annual interest per annum = 3%
Effective interest rate = (1+ i/n) ^n -1
Effective Interest rate = 1+0.0025) ^12-1 = 0.0304 = 3.04%
One Month interest on cash = 3.04%/12 = 0.002533%
Invest the portfolio for one month = 7.3 * (1.002533) = 7.31849 million pounds
Portfolio of Cash on 21st May 2016 = 7.31849 Million Pounds
END
WORKINGS
WORKINGS
Tables of the Normal Distribution
19.QUESTION
health system and economics
For this assessment please find attached the file attached in the assessment the country that is chosen is the USA and that will be compared with Australia
please note individual report part b is 1000 words
- Explain the difference between a put option and a short position in a futures contract.
| Subject | Report Writing | Pages | 11 | Style | APA |
|---|
Answer
The Healthcare System in America
The US healthcare system is considered as one of the most advanced in the world as it leverages technology and innovation, as well as, a highly qualified workforce to provide quality care to its population. The services that are provided in the country are also relatively similar to the services provided in other European countries. Despite this factor, there are certain distinctive features that are unique to the American healthcare system. This paper seeks to provide a summary of the American healthcare system by delving into a discussion on; how the system is both organized and funded; how it performs in terms of the WHO key building blocks; and how a potential health system report that could be implemented could improve weaknesses within the healthcare system.
How the Public Health System in America is both organized and Funded
One of the distinctive GDP that is spent on healthcare. Based on a report that was compiled by Statista, it is apparent that healthcare spending is one of the biggest expenditures that are incurred by the American government (statista.com, 2020). At 18%, healthcare spending accounts for approximately a fifth of overall expenditures within the country (statista.com, 2020). This level of expenditure in healthcare has remained relatively stable over the past ten years. This is almost double the level of expenditure in Australia since the percentage of GDP spent on healthcare in Australia stands at approximately 10%.
When it comes to the question of where the money to fund the system comes from, it is important to note that the US healthcare system is both publicly and privately funded. There is also a fragmented patchwork of programs and systems even as the Americans who are insured are covered by both private and public health insurance (Tunstall, 2020). Private funding of the healthcare system is significant since a majority of Americans are privately insured through plans that have been provided to them by their employers. A substantial portion of the funds that are utilized in the system are also provided for by the government through Medicare, Medicaid, and Veterans Administration.
With respect to the expenditures for public health system, the following is an estimate for the public health services as provided by the Centre for Medicare & Medicaid Services (CMMS); Hospital Care 33%; Physician and Clinical Services 20%; Dental Services 4%; Other Professional Services, 3%; Prescription Drugs 9%; Nursing Care Facilities and Continuing Care Retirement Communities, 5%; Government Administration and Net cost of Health Insurance 8%; Investment 5%; Other, 14% (Centers for Medicare and Medicaid Services, 2018). Considering the fact that the US is a first-world country, it does not receive any development assistance for health.
One of the underlying trends that have contributed to the steady level of expenditure in the US is the increased use of technology within the healthcare setting. There has been an unprecedented level of increase in the use of technology and this has led to sophisticated mechanisms for revolutionizing patient care. It is projected that by the year 2030, an additional US $536.6 billion will have been spent on healthcare in the process of the development of technological infrastructure.
As alluded to above, health coverage in America is not universal. The healthcare system has a fragmented patchwork of publicly-funded and privately-funded programs and this has meant that there is no uniform standard of insurance coverage that is being applied in the country. This level of fragmentation and lack of uniformity has meant that a substantial portion of the American population (10%) is still uninsured (Tunstall, 2010). The implementation of the Affordable Care Act has, however, led to an increase in the level of universal health insurance coverage even as vulnerable members of the population are provided with affordable health insurance.
An economic lever that could be used to achieve a better health outcome in America is the 'Health in all' policy (WHO, 2010). This connotes that in the process of developing, implementing, and evaluating general policies and services, primary regard should be placed on health, well-being, and equity within the population (WHO, 2010). This is in recognition of the fact that general policies have an impact on health policies.
How America performs in terms of the key elements and building blocks of the health system
Just like the American healthcare system is fragmented, service delivery is also fragmented. Due to the existence of multiple sub-systems, it is arguable that there is no standard service delivery system since organizations respond to market forces or the needs that arise within various population segments. With respect to the competency of the health workforce, it is important to note that the workforce is appropriately trained to develop core competencies such as; the provision of patient-centered care; improvement of ability to work within interdisciplinary teams; the implementation of evidence-based practice; application of quality improvements; and the utility of appropriate informatics. The appropriate training of the workforce exists due to the strict quality standards that have been set by various professional bodies in the country. Workforce shortage is also prevalent in various professions within the healthcare system. When reference is made to primary care physicians, for instance, it is important to highlight the fact that there has been a consistent shortfall with respect to the number of physicians. It is projected that by the year 2030, the shortage of primary care physicians will range between 7,300 to 43,100 (AAMC, 2017). This shortage can be handled by increasing funding for faculty development.
Proposed Healthcare System Reform
One of the fundamental ways through which the healthcare system in America can be reformed is through the use of the cost-effectiveness analysis to inform decisions that relate to the allocation of health resources within the system. This will ensure that expenditures within the public health system are well-founded and individuals who remain uninsured are given access to affordable insurance.
Conclusion
The GDP percentage that is used in healthcare in America is 18%. This is almost double the percentage of GDP used in Australia. Funding comes from both public and private sources as the system is fragmented. One of the underlying trends that have led to the increase in expenditure is sustained use of technology in the system. Health coverage is not universal since approximately 10% of the population remains uninsured. Based on the above factors, an economic lever that can be used to achieve a better outcome is the 'health in all' policy. A reform that can also be made to the healthcare system is the use of the cost-effectiveness analysis to inform decisions.
|
|
References
AAMC (June 12, 2017). “Public Health Workforce Shortage” Retrieved from; https://aamc-black.global.ssl.fastly.net/production/media/filer_public/c9/db/c9dbe9de-aabf-457f-aee7-1d3d554ff281/aamc_projections_update_2017_final_-_june_12.pdf
Centers for Medicare and Medicaid Services. (2018).”National Health Dollar; where it came from and where it went.”
Statista.com. (June 8, 2020). "U.S. national health expenditure as percent of GDP from 1960 to 2020." Retrieved from
https://www.statista.com/statistics/184968/us-health-expenditure-as-percent-of-gdp-since-1960/
Tunstall, L. (2020). "Making Sense of the U.S. Health Care System: A Primer." Making Evidence Matter. Retrieved from https://evidencenetwork.ca/backgrounder-making-sense-of-the-u-s-health-care-system-a-primer-2/#:~:text=Overview,insurance%20plans%20through%20their%20employers.
WHO (World Health Organization). Adelaide statement on Health in All Policies: Moving towards a shared governance for health and well-being. Geneva, Switzerland: WHO; 2010.