BD wE Not to be taken a Page 1 of 24 Ra FEB Copyright Reserved BERUAE The Chinese University of Hong Kong, Course Code & Tithe SB RR EH: FIN3010A&B&C_ Financial Markets Time allowed BFR: 2 hours N45 Student LD. No. SEHR: Seat No. BER. Closed-book exam. Answer all questions. Section A: - Multiple-choice questions. - Please answer on the computer sheet. - Use HB pencils only. Section B: - Short questions. - Please answer on this question paper. - Use black or blue ball pens only. Writings in pencils will be treated as rough work and will not be marked. |_ Questions (Marks | Score M | 25Course Code #5 M48R: FINIO0AKB&C Page 2 of 24 Section A: Multiple-choice Questions (1.5 marks each. Total 30 marks.) Py - PT Ce Giety)Course Code EMME: FINZOLOASB&C Page 8 of 24 Section B: Short Questions (Total 70 marks) 21, About a decade ago, we had the Asian financial turmoil. The Hong Kong Government directly intervened the market in August 1999 in order to defend the local currency, Hong Kong dollars (“HKD”), and spent about HKD110 billion. As a result of this market operation and with a view to create minimal disruption to the market subsequently, Tracker Fund of Hong Kong (“TraHK”), the first exchange-traded fund (“ETF”) here, was offered to the general public and debuted on the Stock Exchange of Hong Kong (“SEHK”) on 12 November 1999. Today, there are 42 ETFs traded on the SEHK. About a decade after the Asian financial turmoil, the troubled subprime mortgage loans in the United States (“US”), followed by the collapse of Lehman Brothers in September 2008, ignited the so-called once-in-a-century financial tsunami which hard hit the global economy this time. In that regard, government of different nations, together with their respective central banks, commonly launched stimulus policy with an aim to improve and restore credit facilities. The Hong Kong Monetary Authority (*HKMA) apparently continually injected funds, to a record high level, lately to the Hong Kong market. a) As suggested in its name, what does TraHK actually intend to track? (1 mark) b) Other than exchange-traded or non-exchange-traded, give three major and specifi differences between ETFs and non-ETFs under the Hong Kong context. (3 marks)Course Code $B 4488: FIN3010A&B&C Page 9 of 24 ©) Discuss the mechanism and process of fund injection by the HKMA. Under what basis or system, and whether proactively or reactively, did the HKMA carry out such operations? (5 marks)Course Code EE: FINZOI0A&B&C Page 10 of 24 of such capital inflows lately, market commentators warn about the ty of creation of asset bubble, Discuss the logic behind. 3 marks) e) Apart from your discussion in parts ¢) and d) above, suggest two reasons for such capital inflows lately. (2 marks)Course Code 444888: FINZ010A&B&C Page 1] of 24 22. The collapse of Lehman Brothers on 15 September 2008 surfaced the so-called Minibond issue. Minibonds were unlisted CLNs arranged by Lehman Brothers and marketed in Hong Kong. According to a December 2008 Report issued by the Securities and Futures Commission (“SFC”), there were other unlisted CLNs marketed in Hong Kong, including but not limited to the so-called Octave Notes arranged by Morgan Stanley and the so-called Constellation Notes arranged by DBS Bank. All of these CLNs involved a CDS on a FTD basis. The following information is for Series 18 Notes, adapted from the Issue Prospectus of a non-Minibond CLN which had CDO denominated in US dollars (“USD”) as collateral. Issuer: VP Finance Arranger: Big More International Issue Dat 11 April 2007 Issue Price (at pa USDS,000 per Note Maturity Date 11 October 2012 (ie. 5.5 years after the Issue Date) Coupon Rate: 5.0% Reference Entities: HSBC Bank, Standard Chartered Bank, Bank of China, DBS Bank, China Development Bank, Bank of Ames and JP Morgan Chase. Reference Obligations: Subordinated notes of Reference Entities Collateral: Rated AAA by S&P or Aaa by Moody’s on Is (Note: S8P refers to Standard & Poors) Swap Counterparty: Big More Capital ue Date a) What are the full names for the terms *CDO”, “CDS” and “CLN"? (2 marks) b) What is the meaning of a “subordinated note”? (1 mark)Course Code EMR: FIN3010A&B&C ©) Series 18 Notes offered a higher yield than a straight bond of same maturity. Explain the reason behind and, in that regard, the role that CLN investors, VP Finance and Big More Capital play. 2 marks) d) VP Finance had arranged a plain-vanilla IRS with Big More Capital with respect to Series 18 Notes. What is meant by “IRS” and why would an IRS be required under the Series 18 Notes? Explain the mechanism of an IRS here. (3 marks)Course Code $B 38: FINZOIOASB&C Page 13 of 24 ©) Assuming CDO typical adopts a 80:15:5 structure and the collateral for Series 18 Notes were in fact a particular component of a CDO squared (“CDO™) which was derived from a cash CDO originally consisted of 25 bonds (“Underlying Securities”), of equal amount in terms of face value, issued by companies (“Relevant Companies”) other than those Reference Entities under the Series 18 Notes. (i) What is the implication of the prefix “cash” for the cash CDO? (i mark) (ii) Mustrate how a CDO? can be derived from a cash CDO, Label clearly each component, and its corresponding rating. Circle the particular component that should represent the collateral for the Series 18 Notes. (4 marks)Course Code #48 HK: FINZOIOASB&C Page 14 of 24 (iii) One of the Relevant Companies is lately put on CreditWatch Negative by S&P. its meaning and implication. (3 marks) Explai (iv) Some of the Relevant Companies have lately been kicked out of the Investment Grade category by S&P. What is the simple criterion for an issuer to be treated as within the Investment Grade category? What is the common name for a debt securities said to be of non-Investment Grade? (2 marks)Course Code 5 HR: FINZOI0ASB&C Page 15 of 24 (v) Owing to the financial tsunami, credit events have occurred in respect of several Relevant Companies, as listed below, but not any Reference Entities. Relevant Company Recovery Amount_ No. 03 10.0% No. 07 5.0% No. 14 25% No. 15 30.0% No. 19 1.0% No. 22 15.0% Based on all information aforementioned in this question and ignore transaction costs, suggest the current value, in terms of percentage of par value, of the Series 18 Notes. Explain your answer. (4 marks)Course Code #8 HE: FINZ010A&B&C Page 16 of 24 23. Today is 18 December 2009. The Board of Directors of a red-chip property developer announced at noon today of a final dividend of $1.2 and a special dividend of $3.9 for its ordinary shareholders. Dividends declared are on a per share basis and will be payable in cash on 28 January 2010. The Book Close Period is scheduled to be from 12 to 14 January 2010, both days inclusive. Public holidays within these two months are, namely, Christmas Day, Boxing Day and New Year Day. Here is a ealendar of the period. £5 Ha A eT V/V Fee FS SoM _T WT FS 1 2 39 4 «5 7 2 6 7 8 9 0 11 12 Saeed Ce 7 Gio ial 1416) 06) (zee 16) 110) 10 11 120 «13° «141516 20 21 22 23 24 2% 26 17 18 19 20 21 22 23 a7 2% 29 «30 8t 2 25-26 28 2930 (2 marks) a) When is the ex-dividend date? Explain your answer. b) If tomorrow were the ex-dividend date and today’s closing price were $18, suggest the open share price for tomorrow. Explain your answer. (2 marks)Course Code 4B M488: FIN301I0A&B&C Page 17 of 24 stock” in Hong Kong. (2 marks) ¢) Explain the meaning of a “red- ing asset d) If there were an European call option with the red-chip stock as its underly and expired on 25 January 2010. Discuss the outcome on the quotation of the option premium of this hypothetical call option after the announcement, assuming no change in the cash price of the red-chip stock the entire day today. (3 marks)Course Code #5 #838: FINZ0I0A&B&C Page 18 of 24 ¢) Based on all the information aforementioned in this question, except part d), discuss ‘ou would likely adopt in the real world if early this morning, you had longed an at-the-money January 2010 call stock option traded on the Hong Kong Futures Exchange (“HKFE”), whose underlying asset is the red-chip stock. (4 marks)Course Code #45 M888: FIN3010A&B&C Page 19 of 24 f) Explain the meaning of the term “P/B ratio”, and comment on the typical P/B ratio of a property developer. @ marks)Course Code $B #888: FINZOL0A&B&C HKMC”) is active in issuance of unsecured Ret: car zero-coupon bond exactly three years ago and 24, Hong Kong Mortgage Corporation ( Bonds. For instance, it issued a 5~ intends to offer a new 2-year 4% Retail Bond today, with coupon payable semi-annually. ield-to-maturity and duration (4 marks) a) If the new bond were offered at par, calculate i Show your calculation or otherwise explain clearly your logic. today.Course Code 8 #998: FIN3OI0ASB&C Page 21 of 24 b) If the market interest rate is anticipated to rise next year, suggest which of the two bonds, i.e. the zero-coupon bond or the fixed-income bond, would suffer a bigger drop in bond price. Explain your answer. (3 marks) ©) Explain the meaning of the term “unsecured”. (1 mark)Course Code #4 5 #85: N3010A&B&C Page 22 of 25. Answer any TWO parts. (5 marks for each part. Total 10 marks.) [Write answers for this question on this and the next page. Mark clearly the part you answer. ] a) Futures are traded on the Hong Kong Futures Exchange (“HKFE”) here in Hong Kong. Explain the meaning of the term “open interest”, and discuss how futures contraets traded may have any impact on the open interest. b) Among the reasons for trading securities, hedging and arbitrage are two of them. plain the meaning of each term, Discuss the objective of, and demonstrate with an example for, each of such activities. ©) The directors of a company, which is currently listed on a foreign stock exchange, would like to explore the possibility of having the company’s shares traded/listed on the Stock Exchange of Hong Kong (“SEHK”). Explain the concept of a sponsored Hong Kong depository receipt (“HDR”) (o the directors. What other method will you suggest to them if their immediate objective is not for fund raising of any kind? (Write on the next page if needed)Course Code $8 898: FINZOIASB&C Page 23 of 24 (Imentionally left blank for Question 25) ~ End of Section B -- -./AttachmentCourse Code ®} 5 a# 88: Appendix 1: Present value of an ann FIN3010A&B&C of SI for n periods Attachment Page 24 of 24 o 1% _2% 3% 4% 5% 6% 10% 10.990 0.980 0.971 0.962 0.952093 0.909 2 1970 1.942 1.913 1.886 1.859 1.833 1.736 3 2941 2884-2829 -2775—-2.723 2.673 2487 4 3.902 3.808 3.717 3.630 3.546 3.465 3.170 $4853 4.713 4.580 4329 4.212 3.791 65705 3.601 5.417 S076 4917 458s 7 6.728 6472 6.230 6.002 5.786 5.582 4.808 8 7.652 7326-7020 6.733. 6463 6.210 5.335 9 8566 8.162 7.786 7435 -7.108 6.802 5.759 109.471, 8983, 8.530, 8.117.722.7360. 6.145 110.368 9.787°9.353° 8.760" S306" FBT 6.405 12 11253 10.575 9.984 9385-8863 8384 684 13 12134 ILBMB 10.635 9.986 9.394 8.853, 7.103 14 13.004 12.106 11.296 10.563 9899 9.295 7.367 IS 13865 12.849 11938 1B 10,380 9.712 7.608 16 14.718 13.578 T3.561 11,652 10.838" 10.106 7324 {715562 14.292 13.166 12.166 11.274 10.477 8.02: 18 16398 14.992 13.754 12.659 11.690 10.828 8201 19 17226 15.679 14.324 13.134 12085 11.158 8305 20 18.046 16.352, 14.878 13,590, 12.462. 11.470 8514 11% __ 12% 13% __14% __15% __16% __17% 18% 19% __20% 1 0.901 0893 0.885 0877 0.870 0.862 0.855 0.847 0.840 0.833 2 1.713 1.690 1.668 1.647 1.626 1.605 1.585 1.566 «1ST 1.528 3 2444 2.402 2361 2322-2283 2246 ©2210-2174 2.140 2.106 4 3102 3037 2974 2914-2855 2.708 2.589 5... 31696, 3.605, 3.517. 3.433 3.352 3.274 2.99 6 ESSE TTS 6983. 889 3 7843685 3.336 7 4712 4564 4.423 4.288 4.160 4.039 3.605 8 5146 4968 4.799 4.639 4474344 3.837 9 5537 5328 5.132 4.946 4.772 4.607 4031 10 5.889. 5.650, 5.426 5.216 5.019. 4.833. 4.192 T6307 5.938 S687 5.483 3234S 020 4337 12 6492 6.194 5.918 5.600 S421 5.197 4.430 13 6750 6424 6.122 S842 S583 5.342 533 14 6982 6628 6.303 6.002 5.724 5.468 466i 15 TION 6811 6.462 6.142, 5.847 5.575, 4.675, 167379" "6974 "6.608 6.365" 3.954 5.660 4730 17 7549 7.120 6.729 6373 6.047 5.749 4.775 18 7.702 7.250 6840 6.467 6.128 5.818 4812 19 78397366 6.938 6.550 6,198 5.877 4843 20,,.7.963, 7.469. 7.025 6.623 6.259 5.929 4.870 -- End of Exam Paper ~