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102QP_112000

102QP_112000

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ACTUARIAL SOCIETY OF INDIA
EXAMINATIONS: NOVEMBER 2000
Subject 102: Mathematics of Finance.
Time allowed: Three hours-
Maximum marks 100
1.
Write your candidates number in the space provided.
2.
Do not write your name anywhere in the answer sheets.
3.
Mark allocations are shown in brackets.
4.
Actuarial Tables and graph paper will be available on request.***
5.
You may use simple electronic calculators, but not programmable or capable of storing
prior data.
6.
Attempt all 14 questions
1)
Calculate(I\u00e4 )20\ue000when\u03b4 = 0.08
[3]
2)

In return for an initial investment of Rs. 10,000 an investor will receive Rs. 12500 in 5 years' time. In addition there is a 50% chance that the investor will receive a further payment of Rs. 5000 in 10 years' time. Calculate the expected yield on this investment.

[3]
3)
Given\u03b4 = 0.10, calculate i, l(4) and d (12)
[3]
4)
What is "Hodging"?
[2]
5)

An investor is considering the purchase of 1000 shares in a company, Dividends on the share will be paid annually. The next dividend is due in one year and is expected to be 90Ps. per share. The second dividend is expected to be 9% greater than the first and the third dividend is expected to be 8% greater than the second. Thereafter the dividend is expected to grow at 5% p.a. compound in perpetuity. Calculate the present value of this dividend stream at a rate of interest of 7% p.a effective.

[5]
6)
Prove by general reasoning the relationship( Ia )n\ue000 =\u00e4n\ue000
-nvn
[4]
7)
Explain briefly the following:
(i) Futures
(ii) Options
8)

Under a hire purchase scheme, a person buys a refrigerator by availing a loan on 1st July 2000 and agrees to repay by six equal monthly installments starting from 31st January 2001. If the interest on the loans is calculated using a flat rate of 7 1/2% p.a, determine the APR (Annual percentage rate of charge) for the transaction.

[5]
9)
a)

A 3-year index linked security is issued at time 0. The security pays nominal coupons of 5%annually in arrears and is redeemable at par. The coupons and capital repayment are inflated by reference to the inflation index value 8 months before the payment is made. The inflation index value 8 months before the payment was 105.

The table below shows the index value at other times.
Time
0
4.
12
1
14.
12
2
24.
12
3
Index
107
110
111
113
114
117
120
Calculate the real yield if the price of the stock is Rs. 97.
[6]
b)

For the last 10 years a man has paid Rs. 5000 at the start of each month into a recurring deposit account with a bank that has achieved a real rate of interest of 3% per annum over the period. If the inflation rate has been at a constant rate of 5% per annum calculate the balance in his account today.

[2]
10) The following data related to the assets of an investment fund:
Date
Market value (in Crores)
1 January, 1997
Rs. 29.40
1 January, 1998
Rs. 32.20
1 January, 1999
Rs. 35.70
1 July, 1999
Rs. 35.70
3 December, 1999
Rs. 38.50

The only cash flow during the calendar years 1997, 1998 and 1999 that was not generated from the assets of the fund was a payment of Rs. 140,00,000 received by the fund on 30 june, 1999. For the period from 1 January 1997 to 31 December 1999 calculate:

a)
The money-weighted rate of return.
b)
The time-weighted rate of return, and
c)
The linked annual rate of return.
Express your answers as annual rate rounded to the nearest 0.1%.
[9]
11)
i)
State the two situations when an arbitrage opportunity exists.
[2]
ii) Explain what is meant by the "no arbitrage" assumption in financial mathematics.
[3]

iii) A fixed interest security pays coupons of 8% p.a half-yearly in arrears and is redeemable at 110%. Two months before the next coupon is due, an investor negotiates forward contract in which he agrees to buy Rs. 5 lakhs nominal of the security in ten months' time. The current price of the stock is Rs. 8.40 per Rs. 100 nominal and the risk free force of interest is 5% p.a

Calculate the forward price of this contract assuming no arbitrage.
[5]

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