BAFI1002 Financial Markets and Virgin Galactic Corporation


Questions 1:
a) You are a senior financial analyst and have been asked to examine whether the global financial crisis and the COVID-19 affect financial and non-financial firms to the same extent? For the period beginning in 2006, plot the interest rates on three month nonfinancial commercial paper (FRED code: CPN3M), three-month financial commercial paper (FRED code: CPF3M) and Treasury bills (FRED code: TB3MS). 
Compare the evolution of these interest rates. 
b) Market participants, including financial institutions, fund managers and corporations, must understand monetary policy setting impacts on economic activity and business cycle. A central bank will typically implement monetary policy settings in order to achieve certain economic outcomes over a business cycle. In order to forecast future economic conditions and business activity, business managers therefore need to understand the business cycle. Briefly describe the principal monetary policy objective of the Reserve Bank of Australia and give examples of different economic indicators that may give an insight into the future stages of a business cycle.
Question 2
c) Calculate the market price of each bond on 23rd April 2021 that issued by AAA Ltd., using the data provided in the table below. What is the current total value of minimum application? 
Time to Maturity U.S. Treasury Bond Yield 
1 Yr 0.12% 
2 Yr 0.14% 
3 Yr 0.20% 
4 Yr 0.25% 
5 Yr 0.27% 
7 Yr 0.46% 
10 Yr 0.67% 
Corporate Bonds Fact Sheet Issuer AAA Company Ltd. Issuing date 23rd April 2021
Minimum application 50 Bonds ($ 50,000) 
Interest rate Floating Interest Rate. The Interest Rate is 
the sum of the Market Rate plus the Margin. 
Coupon rate (annual) Central Government Bond Yield + 1.86% p.a. 
Coupon payment Annually (coupon payment is paid on 10th 
July every year) 
Market Yield 4.00%
a) A fund manager has been monitoring the performance of Virgin Galactic Corporation shares (NYSE: SPCE). The shares are currently trading at $34.8 on the New York stock exchange. The fund manager predicts that SPEC shares might rise in value over the next few months. He checked the market and found the related information on the options with a maturity of two months as below. Assume the number of underlying shares per contract is 50 shares.
(i) Please specify the moneyness of the following options. Are they in the money, at the money or out of the money?
Strike Call premium Moneyness Put premium Moneyness 
$30 $3.05 $2.33
$34.5 $3.9 $4.5
$38 $3.2 $3.7
(ii) Which option would you suggest the fund manager to purchase? Why?
(iii)How much would it cost if the fund manager purchases options in ii that cover 1,000,000 shares (ii)?
b) A superfund manager currently manages a diversified Australian shares portfolio with a value of $300 million. The manager decides to use the ASX SPI 200 index futures to hedge a forecasted decline in share prices. As an analyst in the team, you have calculated that the share portfolio requires 2100 futures contract to manage the risk exposure. Assuming S&P/ASX 200 index is currently at $5,500 and one index point is $25. 
(i) Explain to your manager the action your team should take in futures contracts and the total value of futures contracts
(ii) In three months’ time, the manager decides to close out the hedging position. Assuming the S&P/ASX 200 index is at $5,150 at that time. 
Explain how you will close out the open position and show the net valuation effect of the hedging strategy.
Question 3
a) Bharti Airtel plans to expand its network and prepare for the launch of 5G services.The board had approved raising up to ₹21,000 crore by issuing additionalordinary shares to its existing shareholders on a pro-rata basis of one newshare for each fourteen equity shares of Bharti Airtel. The financial advisers to the corporation have recommended the use of an underwriting facility. Using this information, answer these questions.
(i) What type of issue is Bharti Airtel making to its shareholders? Whatare the features of this type of issue?
(ii) What is an underwriting facility, and why might Bharti Airtel use such a facility?
b) Rio Tinto Limited has decided to sell its shale coal part of the business by establishing a new limited liability company to be known as Shoal Limited. Shoal Limited will be a listed corporation on the ASX. Rio Tinto and Shoal decide to issue the new shares at $2.65.
(i) Shoal Limited will be a limited liability company. What are the rights and financial obligations of shareholders that purchase shares in the company?
(ii) One year later, Shoal Limited plans to expand its operations and seek to raise capital to do so. The company advisers recommend that the board of directors choose between a private placement or initial public offering. Explain each of these funding alternatives and discuss the advantages and disadvantages of each alternative.
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