FINANCIAL RISK MANAGEMENT INDEX

A

Accomondation Bills 3.10MAccounting Rate of Return Method (ARR) 4.15Adjusted Present Value (APV) 4.36MAllied Irish Bank (AIB) 2.4MAllsopp Report ead 7.1.1Application Service Provider (ASP) hosting 2.27TArbitrage 5.3BAsset Beta 4.24MAustralian Financial Reporting Standard (FRS) 1.13MAustralian Financial Services (AFS) licensing 1.12Australian Graduate School of Management (AG 4.12MAustralian Guarantee Corporation 3.16BAustralian Prudential Regulation Authority (APR 1.13B 1.21BAustralian Stock Exchange (ASX) 1.12B- Advantages & Disadvantages of listing on the 3.30 - Listing Rule for listed entities 3.29 Ans 3.3AWA Ltd ead 1.2.1 Ans 1.4

B

Back Office 2.16Backwardation (Forward Price < Spot Price) 5.15MBank Bill 3.10BBank for International Settlement (BIS) 2.15MBank Overdraft 3.13TBank VS Corporations (Differences) Ans 1.2Baring Bank Disaster 8.4BBase Currency 7.5BBeta Coefficient 4.10T 4.12MBlack Scholes Merton Option Pricing Model 5.25TBills of Exchange 3.10MBoard's responsibility 2.4MBonds - Types 3.20BBusiness Risk 4.4B

C

Capital Asset Pricing Model (CAPM) 4.10MCapital Budgeting 4.14Capital Budgeting - Advanced 4.28MCapital Structure 4.6Cash Disbursement 3.5TCash Flow Analysis 1.15B 1.16Cash Flow Forecast 3.4B 4.28MCash Flow Management 3.4TCash Management Centralising - Benefits Ans 1.2Cash Settled 5.6MCentralisation VS Decentralisations 1.28Centralisation (Disadvantages) 1.30 Chief Executive Officer (CEO) 1.14MChief Financial Officer (CFO) 1.14MCollars- Foreign Exchange Collars 7.24- Interest Rate Collars 6.20TCommercial Bills of Exchange 3.11TCommercial Paper - US 3.21TCommodity Price Risk 1.5BCommodity Swaps 5.14BCompany Beta 4.12MCompetitor Exposure 1.30MContango (FW Price > Spot Price) 5.15MControl Effectiveness ead 2.1.4Control Model ead 2.1.4Convertible Notes 3.25TCorporate Financial Decisions 4.3MCorporate Governance - Board & Mgt Responsibil 2.4MCorporate Governance - Regulatory Requiremen 1.12MCorporate Law Economic Reform Program (CLER 1.13TCorporate Treaurers - Responsibilities & Obligat 1.12Corporate Treasury history 1.17TCorporate Tresury - Role 1.18B 1.19TCost Centre 1.18M 1.22BCost of Debt 4.7MCost of Debt (After Tax) 4.8MCost of Equity (Use of CAPM) 4.8BCost of Preference Shares 4.12B 4.13Credit Exposure 2.14TCredit Limit Reviews 2.14BCredit Policy Ans 2.2B

Credit Risk 1.5B 2.12M- Controls 2.15M- Counterparty risks 1.5B- Country / political / sovereign risks 1.5B- Estimation 2.12B- Modelling 2.13B- Settlement risks 1.6TCross Currency Swaps (CCY) 5.11M 7.18TCross Rate 7.10MCurrency - Factors affect supply & demand of c 7.3TCurrency Risk Management 7.29

D

Data - Centralisation V Decentralisation 2.24Data Maintenance 2.8BDebentures 3.16Debt Defeasance 3.18TDebt Instruments - Seniority if repayment 3.19TDebt Repurchase Program 3.17BDebt Restructring 3.17Debt Switch 3.18TDeclining Ratio - Benefits 6.8MDerivatives - AASB 139 Definition 5.2M- Embedded Derivatives 5.27M- Foreign Exchange Derivatives 5.29M- Host Contracts 5.28Directors's responsibility & obligations 1.11TDirectors's duty related to treasury function 1.11MDisclosure Rule 3.32Dividend Reinvestment Scheme 3.23B

E

Efficient Frontier 1.7MEffective Interest Rates App 4.7Embedded Derivatives 5.27MEmployee Share Ownership Schemes 3.24BEquity Financing 3.21MEquivalent Annual Annuity (EAA) 4.27TEstimate of returns 4.12T

Exchangeable Notes 3.26MExpectation Hypothesis App 3.3TExpected Return (Formula) 1.7BExposure Management 1.30 Exposure Orientation 1.21BExternal Data 2.8MEurobonds 3.20M

F

Factoring 3.7BFactoring - Advantages & Disadvantages Ans 3.1FENCICS (Option Pricing) 5.4BFinancial Risk- Business Risk 4.4B- Commodity Risks 1.5M- Counterparty risks 1.5B- Country / political / sovereign risks 1.5B- Credit Risk 1.5B- Financial Risk 4.4B- Foreign Exchange Risks 1.5M 7.4- Funding Risks 1.4B 2.11T- Funding Sources 1.4M- Herstatt Risk ead 7.1.1- Interest Rate Risks 1.5T- Junk Bonds 1.6B- Legal Risk 2.18- Liquidity Risks 1.4M 2.11BAns 2.2- Market Risk (Change in MV of instrument) 2.10B- Operational Risks 2.15M 4.4B- Settlement risk 1.6T- Small Organisations 1.4B- Type of risks 1.4MFisher Effect (Nominal Interest Rate) 4.30BFixed & Floating Interest Rate 1.21TFlotation Costs 4.37MForeign Currency Derivatives 5.29MForeign Exchange Management - strategic appr Ans 1.7MForeign Exchange Rate- Collar Option 7.24- Competitive Exposure 7.4- Cross Currency Swaps 7.18T

- Cross Rate 7.10M- Cross Rate Calculations 7.11- Currency Option Pricing 7.20 - Direct Quote & Indirect Quote 7.5B 7.6- Economic Exposure 7.4- Exposure 7.4- Factors influence Supply & Demand of Currenc 7.3T- Foreign Exchange Contracts (FECs) 7.12M- Foreign Exchange Option Strategies 7.21- Forward Hedge & Money Market Hedge 7.15- Forward Points 7.13T- Forward Rate VS Interest Rate 7.14- Historic Rate Rollover (HRR) 7.16M- Market Conventions 7.5M- Participating Forward 7.26- Point 7.7B- Quotation Conventions 7.5B- Spread 7.10T- Transaction Exposure 7.4 7.30T- Translation Exposure 7.4 7.30B- Swap 7.17MForeign exchange risk 1.5M- Competitive exposures 1.5M- Transactions exposures 1.5M- Translations exposures 1.5MForward Rate Agreements (FRA)- Background 5.6M- Interest Rate 6.9B- Pricing 5.7B- Product Overview 5.6B- Settlement Calculation 5.8T- Terminology (3/6 or 1/2 etc) 5.7M- Trading Process 5.8MForward Exchange Contracts (FECs)- Background 5.12M- Foreign Exchange 7.12M- Pricing of FECs 5.13M- Product Overview 5.12BFree Cash Flow (FCF) 3.5MFront Office 2.16Fully Drawn Advances (FDAs) 3.13MFunding Gap 3.8B

Future- Background 5.5T- Initial Deposits 5.6T- Margin Calls 5.6T- Product Overview 5.5M- Trading Process 5.5B

G

Government & Semi Government Bond 3.15B

H

Hedging- Background 8.3- Benefit of AASB 139 8.4- Benefit of hedging 1.9M- Cash Flow Hedges 8.15- Collars 6.20M- Definitions (AASB 139) 8.2- Documentations 8.12B- Dollar Offset method 8.25B- Effectiveness of Hedge 8.25- Fair Value 8.3M- Fair Value Hedge 8.19- Firm Commitment 8.10M- Foreign Operation 8.11B- Forward Hedge 7.15- Interest Cap 6.17B- Interest Floor 6.19- Interest Rate Swaps 6.15M- Matched Terms method 8.27T- Money Market Hedge 7.15- Net Investment Hedge 8.23- Non Financial Items 8.12M- Options and Time Value 8.8B- Probility of future transactions 8.10B- Reasons for hedging 1.9M- Regression Method 8.26M- Sold Options 8.7B- Swaptions 6.21B

Herstatt Risk ead 7.1.1Hire Purchase 3.15THistoric Rate Rollover (HRR) 7.16MHybrid Securities 3.25

I

Implementation Management 2.7TImplied Forward Rate App 3.2MIncremental Cash Flow 4.28MInflation effect on cash flow 4.30M S.G. P23Initial Public Offering (IPO) 3.22BInterest Rate - Fixed 6.6MInterest Rate Risks 1.5T 6.2- Collars 6.20T- Declining Ratio - Benefits 6.8M- Forward & Futures 6.9B- FRA vs Swap 6.15M Ans 5.1- Interest Rate Risk Management 6.3M- Normal Zero Curve 6.7B- Options 6.17- Sensitivities of interest rate 6.4T- Short Term & Long Term IRR Management 6.3B- Swaptions 6.21- Timeframe 6.4BInterest Rate Swaps (IRS) 5.8BInternal Control Environment 2.8MInternal Environment 1.32Internal Rate of Return Method (IRR) 4.17MIRR Method - Disadvantages & Problem 4.20TInternational Accounting Standard (IAS) 1.13International Swaps and Derivative Association 2.18TInterpolation 4.17BInvestment - Speculative & Non-Speculative 5.4M

J

Junk Bonds 1.6B

K

Key Performance Indicators (KPI) 2.16B

L

Lags (4 Types) 1.30MLamfalussy Minimum Standards ead 7.1.4Leasing 3.14Legal Risk 2.18Liquidity 3.4TLiquidity Preferences App 3.3MLiquidity Risk 1.4B 2.11BAns 2.2Listed and non-listed company 3.22MLong Term Debt Financing 3.15B

M

Management Implementation 2.7TManagement Responsibility 1.14MManagement Strategy 1.30BManagement VS Senior Management 2.5TMargin Calls 5.6TMarket Conventions - FX Rate 7.5Market Risk (Change in MV of instruments) 1.5T 2.10BMarket Risk Premium 4.12MMarket to Market 1.21MMiddle Office 2.16Monitoring & Reporting 2.8TMortgage Repayments App 4.5Murex (Bond & Derivative Pricing) 5.4B

N

National Bank Australia (NAB)- Analysis 2.19- Management & Culture 2.22- Reasons for losses (failure) 2.4T- Systems 2.23Negative Pledge Borrowing 3.18MNegotiable Certificate of Deposits (NCD) 3.11BNet Present Value Method (NPV) 4.16B

Normal Zero Curve 6.7BNovation Process 5.5BNPV & IRR Comparison 4.18M

O

One Point Entry 2.25TOpening exposures 1.19MOpearational Risk- Board & Mgt's Responsibilities 2.4B- Conttrol 2.15B 2.16- Definition 2.4B 2.15M 4.4BOpportunity Cost 4.28BOptions- Call Options (Long Call) 5.18B- Call Options (Short Call) 5.19B- Currency Option Pricing 7.20 - Definition 5.15B- Foreign Exchange 7.18- Interest Rate 6.17- Premium Determination & Greeks 5.25- Premium Sensitivity 5.25M- Put Options (Long Put) 5.21B- Put Options (Short Put) 5.23T- Terminology 5.15B- Types of underlying assets 5.17BOrdinary Shares 3.21MOrganisations - value added 1.18TOverhead Allocations 4.28BOver-the-counter products (OTC) 5.8M

P

Partnerships 3.28MParticipating Forward (FX) 7.26PayBack Method 4.16TPasminco - Reasons of collapse Ans 1.3B 7.31Placements 3.23MPoint (PIP) 7.7BPortfolio diversification techniques 2.13TPosition Management 1.20 Position taking 1.14

Preferences Shares 3.25MPreferences Shares - Cost (Valuation) 4.12BPresent Value Index 4.18BPre-settlement Risk 2.12MPrice marking and taking 1.20TProfit Centre 1.18M 1.19B 1.22Profit Centre - Characteristics 1.22BProject Financing 3.19MProject Risk Calculation 4.24Project Team Function ead 2.1.1Project with different lives - Calculation 4.26BPromissory Notes 3.11Public Fund Raising 3.31Public Issue Ans 4.9MPure Play Technique (WACC) 4.24M

Q

Qualitative Factors 4.6Quantitative Factors 4.7MQuotation Conventions - FX 7.5B

R

Request for Information (RFI) 2.27MRequest for Proposal (RFP) 2.27B 2.28TRight issues 3.23T Ans 4.9MRisk Analysis 2.5BRisk appetite 1.13BRisk Assessment & priorty setting 2.6T ead 2.1.2Risk Altering Projects 4.24BRisk averse 1.14TRisk Committee - Role 1.14BRisk Identification 2.5M 7.29Risk Management Plan (RMP) 2.7TRisk Management Process ead 2.1.1Risk Measurement (FX) 7.29Risk-neutral 1.14TRisk Policy & Procedure 2.7Risk Treatment 2.6M

S

Sarbanes-Oxley Act (SOA) 1.12BSecurity Market Line (SML) 4.11TSegment markets App 3.3Sensitivity Analysis 1.5T 1.8B 6.6TSettlement Risk ead 7.1.2Side Effects 4.28BSole Trader 3.28TSophisticated Investor - s 709 3.23BSource of Funds 3.10 Speculation 1.22MSpeculative Investment 5.4TSpot Interest Rate App 3.1Spread - FX 7.10TStraight-through-processing (STP) 2.23BStrategic Implementation 7.30TSubsidised Borrowing 4.37BSunk Cost 4.28MSwap- Commodity Swaps 5.14B- Cross Currency Swap (CCY) 5.11M- Foreign Exchange Swap 7.17M- Interest Rate Swap 5.8B 6.14B- Pricing of Interest Rate Swap 5.10M- Settlement of Cross Currency Swap 5.12M- Settlement of Interest Rate Swap 5.10BSwaptions - Interest Rate 6.21Systematic Risk (Market Risk) 4.9B

T

Tax Shields 4.28BTechnology advance 2.8B 2.23BTemporal Simulation Approach 2.13BTesting & Verification 2.9TTerm Currency 7.5BTerm Loans 3.13BTrade Bills 3.10MTreasurer - responsibilities & obligations 1.12 1.15Treasury Function 1.17BTreasury Management System (TMS) 2.25B 2.26Treasury Management System (TMS) - Procedur Ans 2.3

Treasury Management System (TMS) - Summar 2.28BTreasury Operation - Centralisation VS Decentral 1.28Treasury Risk & Control 2.9BTreasury Risk Management Framework 1.31 1.32TTreasury Type 1.24B- Active 1.26B- Reactive 1.25B- Static 1.25 1.26Trust Deed 3.16M

U

Unsecured Notes 3.17TUnsystematic Risk 4.9BUS Commercial Paper (CPs) 3.21T

V

Value-at-risk (VAR) technique 2.13TVariance of returns (Formula) 1.8TVenture Capital 3.22T

W

Weight Average Cost of Capital (WACC) 4.21Working Capital Management 1.28B 3.7 4.28M- Factoring 3.7B- Factoring (Advantages & Disadvantages) Ans 3.1- Funding Gap 3.8B- Measurement 3.8M- Strategies 3.7

Y

Yield Curve App 3.1

Module 1

1) Expected Return (P 1.7B)

= (Return A * Probability A) + (Return B * Probability B) + …

2) The Variance of returns (P 1.8T)

= (Return - Expected Return) ^ 2 * Probability

= Square root of the answer above

3) Probability of return less than 0 (P. 18.M)

= (Expected Return) / (Standard variation of Return)= (Answer in 1 / Answer in 2)= Round the answer to the nearest $0.1, then check the table at appendix 1.1, vertical = 0 column

Module 3

1) Current Ratio (P 3.4)

= Current Asset / Current Liabilities

2) Quick Ratio

= (Current Assets - Inventory) / Current Liabilities

3) Net Operating Cash Flow

4) Free Cash Flow

= Net Operating CF - New invested capital (Investment)While "Net Operating Cash Flow" = Answer in 3

5) Accounts Receivable Period (P 3.8)

= Accounts Receivable / Average Day Sales

while, Expected return = Answer in Formula 1

= Net income - Depreciation or Amortisaton + Change in Debtors / Creditors

While Net Annual Sales / 365 = Average Day Sales

6) Accounts Payable Period

= Accounts Payable / Average Days Cost of Goods Sold (COGS)While Average Days COGS = Annual COGS / 365

7) Work-in-Process (WIP) Period

= WIP / Average Days SalesWhile Average Days Sales = Net Annual Sales / 365

8) Pricing of Bills of Exchange, Promissory Notes and Government Securities (P 3.12M)

= (Face Value of Bill) / 1 + { (f / 365) * i }

Module 4

1) Valuation / Price of a Bond (P 4.8)

= ( Face Value * Coupon Rate) * [ 1 - ( 1 + Current Market + FV * ( 1 + Current %) ^ - n

Current Market Yield %

Note: If coupon paid semi annually, remember n * 2, Coupon % and Market Yield % / 2

2) After-Tax Cost of Debt

= Kd * ( 1 - Corporate Tax Rate)

3) Cost of Debt (Study Guide Slide 18)

Price of Bond = (Face Value + ( FV * Coupon %)) / ( 1 + Cost of debt)

4) Valuation of Mortgage (Ans 4.1, P. 4.23)

= (Value of Mortgage * Mortgage rate) / [ 1- ( 1 + Mortgage Rate ) ^ - nWhile n = Years remaining until maturity

While, f = Number of days to maturity; i is the Simple Interest per annum

Step 1 = Calculate Annuity (Annual Repayment)

= A * ( 1 - ( 1 + Current Market Mortgage Rate) ^ - n) / Current Market Mortgage RateWhilw A = Annuity (Answer in Step 1), n = years remaining until maturity

5) Capital Asset Pricing Model (CAPM) - Cost of Equity (P 4.10M)

= Risk-free Rate + ( Company's Beta * Market Risk Premium %)While "Market Risk Premium" = Expected Return on Portfolio - Risk Free Rate of Interest

6) Cost of Preferences Shares (P 4.12B)

Current Market Price of Preference Shares (P) = Value of Annual Dividend / Current Market Cost of Preference Shares or Required Return on Preference Shares

7) Accounting Rate of Return (ARR) (P 4.15)

Step 1 : Calculate Depreciation of the project assetStep 2 : Calculate Annual Net Profit = Net Cash Inflow - Expenses (Incl. Depreciation)Step 3 : Calculate ARR = Annual Net Profit / Initial Cash OutlayStep 4 : Compare the ARR with the predetermined ARR "cut-off rate"

8) Payback Method (P 4.16)

= Initial Cash Outlay / Annual Net Cash Inflow

9) Net Present Value Method (P 4.16)

= {Annuity * [ 1 - ( 1 + r ) ^ - n ] / r } - Initial Cash Outflow

10) Present Value Index ( P 4.18B)

= (PV of Net Cash Inflow / Initial Cash Outlay)

11) Weighted Average Cost of Capital (WACC) (P. 4.21)

= Kd * (D/V) + Kp * (P/V) + Ke * (E/V)

Step 2 = Calculate Present Value of Mortgage

while Kd = Cost of Debt , Kp = Cost of Preference Shares, Ke = Cost of equity D = MV of Debt, E = MV of Equity, P = MV of preference shares V = D+E+P

12) After Tax WACC ( P 4.33)

= Kd ( 1 - Tax Rate) (D/V) + Kp * (P/V) + Ke * (E/V)

13) Project with Different Risk (use other company's beta & Debt : Equity Ratio) ( P 4.25)

Ke = Risk Free Rate + Other Coy's Beta * Risk Free Premium

Ke = Ke* + ( 1 - Tax Rate ) * ( Ke* - Risk free rate) * (Other Coy's D / E)

Ke = y + ( 1 - Tax Rate) * (y - Risk free rate) * (Your own coy's D / E)

WACC = Risk free rate ( 1 - Tax rate) (Own Coy's D / V) + y ( Own Coy's E / V)

14) Project With Different Lives (Lowest Common Life Method) (P 4.26)

For example, if Project A Life = 3 years; Project B Life = 4 yearsThen Common NPV of Project A = NPV of A + NPV of A * ( 1 + r )^ -3 + NPV of A * ( 1 + r ) ^ -6

Common NPV of Project B = NPV of B + NPV of B * ( 1 + r )^ -4 + NPV of B * ( 1 + r ) ^ -8(Repeated 3 times, which is the Lowest Common Multiple with Project B)

15) Project with Different Lifes ( Continuous Replacement Method ) (P 4.27, S.G. Slide 58)

Step 1 = Calculate "Cost of Equity" using CAPM

Step 2 = Calculate Ke*(Systematic Risk of portfolio)

while D = Debt Ratio , E = Equity Ratio (Both Other coy)

Step 3 = Calculate Ke (Own Coy's Intended Debt Level)

while y = Answer in Step 2, D = Own coy's Debt Ratio, E = Own Coy's Equity Ratio

Step 4 = Calculate WACC

while y = Answer in Step 3, D = Own Coy's Debt Ratio, E = Own Coy's Equity Ratio,

Step 1 = Calculate the NPV of each project separtely (Refer to NPV Calculation above)

Step 2 = Choose a Common Multiple Life for projects

Step 3 = Calculate NPV of the series of repetition

+ NPV of A * ( 1 + r ) ^ -9 (Repeated 4 times, which is the Lowest common multiple with Project B)

NPV = A * [ 1 - ( 1 + r ) ^ -n ] / rA = r * NPV / [ 1 - ( 1 + r ) ^ -n ]while r = Discounted rate , n = Lowest common multiple in period

Project A = Answer in Step 2 / rwhile r = Discounted rate

16) Depreciation Tax Shields ( Study Guide Slide 66)

Year 1 = ( Depreciation rate * Book Value ) * Tax rate

Year 2 = ( Depreciation rate * ( Book Value - Depreciation at year 1) * Tax Rate)

17) Tax on the disposal of assets (Capital Gains Tax) (SG Slide 67)

= ( Sales Proceeds - Carried Down Book Value ) * Tax Rate

18) Inflation Effects (Fishers' Effect) (P 4.30B)

( 1 + n ) = ( 1 + r ) ( 1 + E(i) )while n = nominal interest rate, r = real interest rate, E(i) = Expected rate of inflation

19) Interest Coverage Ratio (Ans 4.9)= EBIT / Interest Charges

Module 5

1) Forward Rate Agreement (FRA) Pricing (P 5.7B)= { 1 + ( Long Term Rate / Period ) / 1 + (Short Term Rate / Period ) - 1 * 100 * 365 / Days in Forward Period

2) FRA Settlement Calculation (P 5.8)PV = Principal / ( 1 + r1 ( n / 365 ) ) - Principal / ( 1 + r2 ( n / 365 ))

3) Forward Exchange Contract (FECs) (P 5.13M)

Step 1 = Calculate the NPV of each project

Step 2 = Calculate the EAA of each project

Step 3 = Calculate Perpetuity of each project

Spot Rate * [ 1 + ( It * D / Basis Year) ][ 1 + ( Ib * D / Basis Year ) ]

while It = Interest rate of term currency, Ib = Interest rate of base currencyD = Number of days in the period, Basis Year = 360 days for US & Euro, 365 days for AUDSpot = Spot Exchange Rate

4) Option - Long Call (P 5.18)

Pay-off = Max ( Spot Price at maturity - Exercise Price , 0 )If answer is below 0 (negative), it becomes 0

Profit = Max ( Spot Price at maturity - Exercise Price, 0 ) - Call Option Premium

5) Option - Short Call (P 5.19)

Pay-off = - Max ( Spot Price at maturity, 0 )If answer is negative, then 0, if answer is positive, then negative

Profit = Call Option Premium - (Spot Price at maturity - Exercise Price , 0 )

6) Option - Long Put (P 5.21)

Pay-off = Max ( Exercise Price - Spot Price at maturity, 0 )If answer is below 0 (negative), it becomes 0

Profit = Max ( Exercise Price - Spot Price at maturity, 0 ) - Option Premium

7) Option - Short Put (P 5.23)

Pay-off = - Max ( Exercise Price - Spot Price at maturity, 0 )If answer is negative, then 0, if answer is positive, then negative

Profit = Put Option Premium - Max ( Exercise Price - Spot Price at maturity, 0 )

Module 6

1) Forward Rate (P 6.7)= { ( 1 + rn) ^ N / ( 1 + rn) ^ N - 1 }

2) Buyer (Long) Pay-off on FRA

= (BBSW - FRA Rate)= (PV Notional Value @ FRA Rate - PV Notional Value @ BBSW Rate)

3) Seller (Short) Pay-off on FRA= (FRA Rate - BBSW)= (PV Notional Value @ BBSW Rate - PV Notional Value @ FRA Rate)

4) Price of Long (Buyer) 90 Day BAB Futures= (100 - BBFR)where BBR = ( 1 - Bank Bill Future Price) or (Market Interest Rate or Floating Rate)where BBFR = ( 1 - Price of 90 day BAB) or (Future Agreed Rate or Fixed Rate)

5) Buyer (Long) Pay-off on Interest Rate FuturesBuyer Pay-off = (90 day BBR - 90 day BBFR)Buyer Pay-off = (PV (Notional Principal @ 90 day BBR) - PV (Notional Principal @ 90 Day BBFR)

6) Seller (Short) Pay-off on Interest Rate Futures Seller Pay-off = (90 day BBFR - 90 day BBR)Seller Pay-off = (PV (Notional Principal @ 90 Day BBFR) - PV (Notional Principal @ 90 day BBR))

7) Interest Rate Swaps - Fixed Rate Payers' Pay-off= BBSW - Swap Rate

8) Interest Rate Swaps - Floating Rate Payer's Pay-off= Swap Rate - BBSW

9) Interest Rate Options - Long Call (Use for borrowers)Buyer Pay-off cap = Max (BBSW - Cap Rate , 0 )Profit Long Cap = Pay-off Cap - Cap Premium = Max (BBSW - Cap Rate, 0) - CPIf answer positive = receipts, negative = Option expired / No Payment

10) Interest Rate Options - Short Call Seller Pay-off = - Max (BBSW- Cap Rate, 0 )Seller Profit = CP - Max (BBSW - Cap Rate, 0 )

11) Interest Rate Option - Long Put ( Buyer)Buyer Pay-off Long Flooe = Max (Floor rate - BBSW, 0 )Profit Long Floor = Pay off Floor - Floor Premium (FR) = Max (Floor Rate -BBSW, 0) - FPIf answer positive = receipts, negative = Option expired / No Payment

12) Interest Rate Option - Short Put (Seller)Seller Pay-off Short Floor = -Max (Floor Rate - BBSW, 0)Progit Short Floor = FP - Max (Floor Rate - BBSW, 0)

13) Interest Rate Collars - Long Collar (Buyer) (P 6.20)Pay-off Long Collar = Max (BBSW - Cap Rate , 0 ) - Max ( Floor Rate -BBSW, 0 )Profit Long Collar = { Max (BBSW - Cap Rate, 0 ) - Max (Floor Rate - BBSW, 0) } - (CP - FP)while If the collar is "zero cost collar", then CP = FP

14) Interest Rate Swaptions - Long Payer Swaption ( P 6.21)Pay-off = Max (Swap Rate - Swaption Rate , 0)Profit = Max ( Swap Rate - Swaption Rate, 0) - Payer Swaption Premiumwhile Swap Rate = Variable, Swaption Rate = Fixed

15) Interest Rate Swaptions - Long Receiver Swaption Pay-off = Max (Swaption Rate - Swap Rate, 0)Profit = Max (Swaption Rate - Swap Rate, 0) - Receiver Swaption Premiumwhile Swap Rate = Variable, Swaption Rate = Fixed

= Round the answer to the nearest $0.1, then check the table at appendix 1.1, vertical = 0 column

Amortisaton + Change in Debtors / Creditors

8) Pricing of Bills of Exchange, Promissory Notes and Government Securities (P 3.12M)

FV * ( 1 + Current %) ^ - n

Note: If coupon paid semi annually, remember n * 2, Coupon % and Market Yield % / 2

= A * ( 1 - ( 1 + Current Market Mortgage Rate) ^ - n) / Current Market Mortgage Rate

While "Market Risk Premium" = Expected Return on Portfolio - Risk Free Rate of Interest

Current Market Price of Preference Shares (P) = Value of Annual Dividend / Current Market Cost of Preference Shares or

Step 2 : Calculate Annual Net Profit = Net Cash Inflow - Expenses (Incl. Depreciation)

while Kd = Cost of Debt , Kp = Cost of Preference Shares, Ke = Cost of equity

13) Project with Different Risk (use other company's beta & Debt : Equity Ratio) ( P 4.25)

WACC = Risk free rate ( 1 - Tax rate) (Own Coy's D / V) + y ( Own Coy's E / V)

14) Project With Different Lives (Lowest Common Life Method) (P 4.26)

Then Common NPV of Project A = NPV of A + NPV of A * ( 1 + r )^ -3 + NPV of A * ( 1 + r ) ^ -6

Common NPV of Project B = NPV of B + NPV of B * ( 1 + r )^ -4 + NPV of B * ( 1 + r ) ^ -8

15) Project with Different Lifes ( Continuous Replacement Method ) (P 4.27, S.G. Slide 58)

= Own Coy's Equity Ratio

= Own Coy's Equity Ratio, V = D + E

= Calculate the NPV of each project separtely (Refer to NPV Calculation above)

(Repeated 4 times, which is the Lowest common multiple with Project B)

Year 2 = ( Depreciation rate * ( Book Value - Depreciation at year 1) * Tax Rate)

while n = nominal interest rate, r = real interest rate, E(i) = Expected rate of inflation

= { 1 + ( Long Term Rate / Period ) / 1 + (Short Term Rate / Period ) - 1 * 100 * 365 / Days in Forward Period

while It = Interest rate of term currency, Ib = Interest rate of base currencyD = Number of days in the period, Basis Year = 360 days for US & Euro, 365 days for AUD

Profit = Max ( Spot Price at maturity - Exercise Price, 0 ) - Call Option Premium

Profit = Put Option Premium - Max ( Exercise Price - Spot Price at maturity, 0 )

where BBR = ( 1 - Bank Bill Future Price) or (Market Interest Rate or Floating Rate)where BBFR = ( 1 - Price of 90 day BAB) or (Future Agreed Rate or Fixed Rate)

Buyer Pay-off = (PV (Notional Principal @ 90 day BBR) - PV (Notional Principal @ 90 Day BBFR)

Seller Pay-off = (PV (Notional Principal @ 90 Day BBFR) - PV (Notional Principal @ 90 day BBR))

Profit Long Cap = Pay-off Cap - Cap Premium = Max (BBSW - Cap Rate, 0) - CP

Profit Long Floor = Pay off Floor - Floor Premium (FR) = Max (Floor Rate -BBSW, 0) - FP

Pay-off Long Collar = Max (BBSW - Cap Rate , 0 ) - Max ( Floor Rate -BBSW, 0 )Profit Long Collar = { Max (BBSW - Cap Rate, 0 ) - Max (Floor Rate - BBSW, 0) } - (CP - FP)