Banking and Finance

Tutorial Exercises

BFF5220
Applied Investments
Semester 2, 2023

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https://www.monash.edu/business/banking-and-finance
 BFF5220 Applied Investments
WEEK Starting LECTURE TOPIC ASSIGNED TUTORIAL TOPIC
READING
1 24 Jul Financial Markets, BKM, Ch. 3, 5 Self-study on Pre-Semester
Securities Trading and Test, Accounting and
Performance Statistics. Group Formation.
Measurement Free-Style Discussion of
Articles on Fin Mkt News.
2 31 Jul Portfolio Theory BKM, Ch. 6, 7 Financial Markets, Securities
Trading and Performance
Measurement
3 07 Aug Asset Pricing Models BKM, Ch. 9, 10 Portfolio Theory
4 14 Aug Asset Pricing Models BKM, Ch. 9, 10, 17 Asset Pricing Models
(cont.)
Fundamental Analysis I Other reading on
Moodle In-tutorial Group Assignment
Instruction Discussion, Q&A
5 21 Aug Fundamental Analysis II BKM Ch. 18 Formative task: Online
submission of literature review
of return patterns

Fundamental Analysis I

6 28 Aug Fundamental Analysis III BKM Ch. 18 Fundamental Analysis II &

Advanced/Practical Topics in
Other reading on Fundamental Analysis
Moodle
7 04 Sep Market Efficiency BKM Ch. 11 Formative task: Submission
of first attempt on R
programming code for one
return pattern.

Review of Mid Semester Test

& Advanced/Practical Topics
in Fundmanetal
8 11 Sep Behavioural Finance BKM Ch. 12 Market Efficiency

9 18 Sep Options Trading BKM Ch. 20 Behavioural Finance

Strategies
Mid-Semester Break starting on 25 Sep
10 02 Oct Option Valuation BKM Ch. 21 Options Trading Strategies

11 09 Oct Futures, Forwards and BKM Ch. 22, 23 Option Valuation

Swaps

12 16 Oct Fixed Income Securities BKM, Ch. 15, 16 Futures, Forwards and Swaps

SWOT/VAC 23 Oct SELF STUDY, Fixed Income Securities

Mid-Semester Test Mid-Semester Break Asset Pricing Group Assignment

Students are required to prepare answers for all questions. Due to time constraints, students are
encouraged to nominate the questions/problems for discussion at the commencement of each
tutorial. Solutions for all questions will be available in the form of video recordings by the end of
each week.
Topic 1 Week 2 – Financial Markets, Securities Trading
and Performance Measurement

Q.1.

a. What is the difference between market orders and price-contingent orders?

b. Which type of order is often used together with short sales (sales of securities you
don’t own but have borrowed from your broker) to limit potential losses from the
short position?
i. Limit orders
ii. Price-contingent orders
iii. Stop-loss orders
iv. Stop-buy orders
v. Market orders

c. Consider the following limit-order book for a share of stock of a specialist. The
last trade in the stock occurred at a price of $50.

Limit Buy Orders Limit Sell Orders

Price Shares Price Shares

49.75 500 50.25 100

49.50 800 51.50 100

49.25 500 54.75 300

49.00 200 58.25 100

48.50 600

i. If a market buy order for 100 shares comes in, at what price will it be
filled?
ii. At what price would the next market buy order be filled?
iii. If you were a security dealer, would you want to increase or decrease your
inventory of this stock?

Q.2.

How do margin trades magnify both the upside potential and downside risk of an
investment portfolio?

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Q.3.

a. Dée Trader opens a brokerage account and purchases 300 shares of Internet
Dreams at $40 per share. She borrows $4,000 from her broker to help pay for the
purchase. The interest rate on the loan is 8%.
i. What is the margin in Dée’s account when she first purchases the stock?
ii. If the share price falls to $30 per share by the end of the year, what is the
remaining margin in her account? If the maintenance margin requirement
is 30%, will she receive a margin call?
iii. What is the rate of return on her investment?

b. Old Economy Traders opened an account to short sell 1,000 shares of Internet
Dreams from the previous problem. The initial margin requirement was 50%.
(The margin account pays no interest.) A year later, the price of Internet Dreams
has risen from $40 to $50, and the stock has paid a dividend of $2 per share.
i. What is the remaining margin in the account?
ii. If the maintenance margin requirement is 30%, will Old Economy receive
a margin call?
iii. What is the rate of return on the investment?

Q.4.

You are optimist about Telecom shares. The current market price is $50 per share, and
you have $5,000 of your own to invest. You borrow an additional $5,000 from your
broker and invest $10,000 in the shares. How far does the price of Telecom shares have
to fall for you to get a margin call if the maintenance margin is 30%? Assume the price
fall happens immediately.

Hint: Margin call happens when the equity in your account to the value of your stocks
falls below the maintenance margin level of 30%.

Q.5.

You are pessimistic about Telecom shares and decide to sell short 100 shares at the
current market price of $50 per share.

a. How much in cash or securities must you put into your brokerage account if the
broker’s initial margin requirement is 50% of the value of the short position?

Hint: You need to put into your brokerage account an initial margin so that the ratio of
your equity to the value of the stocks is at least equal to the brokerage house’s initial
margin requirement.

b. How high can the price of the stock go before you get a margin call if the
maintenance margin is 30% of the value of the short position?

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Q.6.

Suppose your expectations regarding the stock price are as follows:

State of the market Probability Ending Price Holding Period Return (HPR)
Boom 0.35 140 44.5%
Normal growth 0.30 110 14%
Recession 0.35 80 -16.5%

Compute the mean and standard deviation of the HPR on stocks

Q.7.

Choose the best answer:

a. Which of the following statement is correct?

i. When the distribution of returns is positively skewed, the standard
deviation underestimates risk
ii. When the distribution of returns is negatively skewed, the standard
deviation underestimates risk
iii. When a distribution is “skewed to the right”, its skewness measure is
negative
iv. When a distribution is “skewed to the right”, its skewness measure is
positive
v. (i) and (iii) are correct
vi. (ii) and (iv) are correct

b. Which of the following statement is incorrect?

i. Kurtosis concerns the likelihood of extreme values on either side of the
mean at the expense of a smaller likelihood of moderate deviations
ii. Kurtosis measures the degree of fat tails
iii. Standard deviation will overestimate the likelihood of extreme events
when the tails of a distribution are fat
iv. Excess kurtosis of a normal distribution is defined as zero, and any excess
kurtosis above zero is a sign of fatter tails.