EXAM STUDY GUIDE: Equity Markets

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1 EXAM STUDY GUIDE: Equity Markets

Copyright 2010 Australian Financial Markets Association (AFMA) All rights reserved No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any

2 Copyright 2010 Australian Financial Markets Association (AFMA) All rights reserved No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means (electronic, mechanical, photocopying, recording or otherwise) without the prior written permission of AFMA. Every effort has been made by AFMA to observe and acknowledge the copyright of third parties. However there may be circumstances where, despite these efforts, AFMA has not been able to do so. AFMA sincerely apologises for any accidental infringement of copyright and welcomes information that will enable it to redress the situation. All copyright enquiries including requests for permission to use any material contained in this publication should be directed to the Learning Design Manager at the following address: AFMA Level 3 95 Pitt Street Sydney NSW 2000 GPO Box 3655 Sydney NSW 2001 Phone: (+61 2) Fax: (+61 2) Disclaimer This publication is distributed on the condition and understanding that AFMA is not engaged in providing any legal, accounting or other professional advice or services. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. Although AFMA and its editors, consultants and authors endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. AFMA and its editors, consultants and authors disclaim liability for any act and/or omission on the part of any person or entity in reliance or purported reliance (whether in whole or in part) on the content or any part of the content. Further, AFMA and its editors, consultants and authors are not liable for any errors or omissions in the content or for any consequences resulting from any errors or omissions. Making AFMA events greener AFMA is committed to reducing the direct and indirect environmental impacts our business activities have on our environment. By measuring, offsetting and reducing our carbon footprint, AFMA believes we are contributing to a real and measurable positive change. See < for details of initiatives.

3 Introduction to the exam study guide The best way to prepare for the exam is to methodically work your way through the Learning Guide (LG) and the Readings Manual (RM). This exam study guide identifies some of the knowledge and skills that you should acquire as you work through the LG. For many of the concepts you will see a reference to the LG or the pertinent reading in the RM (e.g. R.1.1), followed by a reference to the relevant page number. If there is no direct reference, refer to the relevant learning outcome in the LG. Before you attempt the exam for this module, read through this guide and make sure that you have a good understanding of all the concepts listed. For any points that you do not understand, review the applicable section of the RM or LG. Chapter 1: Equities Before you sit the exam for the Equity Markets module, make sure that you know how to: calculate the market s required return on a preference share (R.1.1, p.21) calculate the fair value of a share using the constant dividend growth rate model (R.1.1, p.22); and the variable dividend growth rate model (R.1.1, p.23) calculate the theoretical value of a right in a rights issue (R.2.1 p.88) In addition, make sure that you can: describe the following equity securities convertible securities, including how they rank relative to ordinary shares and debt in the event of bankruptcy (R.1.1, p.11) dual-listed securities, including the factors that impact on their relative pricing (R.1.2) ADRs, including why they are used (R.1.1, p.19) IPOs, including the motivations for issuing and investing in them (R.2.1, pp.73-85) EQUITY MARKETS EXAM STUDY GUIDE HO1-1

4 outline the basics of taxation for shares (R.1.4) discuss the equity transaction process CHESS, ASTC, CLICK XT, HIN, SRN, DvP, and T+3 types of market order (R.3.3) describe common trading strategies and their associated benefits and risks algorithmic trading and DMA (R.4.2, R.4.3) margin lending (R.4.5) securities lending (R.4.5 and R.4.6) understand the main financial ratios used to analyse a company s profitability and value (R.5.1) discuss the following aspects of the market performance of equities factors that influence the level of dividends paid by a company (R.5.1) how share price indices are calculated (R.3.1, pp ) Chapter 2: Equity Derivatives Before you sit the exam for the Equity Markets module, make sure that you know how to: calculate a hedge using SPI futures (R.7.1) calculate the a) maturity payoff diagram b) maturity cash flow and c) net cash flow after including premiums received and paid, for the option strategies below. You should also understand the risks and benefits of each strategy (R.8.1). buying and writing calls and put options buying and selling call spreads writing covered calls straddles and strangles stock repair strategy collar strategy 90/10 strategy butterfly call spread use ASX index options for hedging and for profiting from a view on market direction use put-call parity to create synthetic positions (R.7.2, p.306) calculate the total price paid for an option holding given the option premium (R.7.2) HO1-2 AUSTRALIAN FINANCIAL MARKETS ASSOCIATION

5 In addition, make sure that you can: describe the different types of equity options listed in Australia (LG, pp ) discuss the following aspects of options and futures first and second generation derivatives and their risk characteristics (R.6.1) factors affecting the fair value price of SPI futures (R.7.1) difference between American and European style options (R.7.2) time value and intrinsic value for options (R.7.2) basic factors affecting option prices (R.7.2) use of the Greeks delta, gamma, vega, iota to calculate the sensitivity of an option to changes in different variables (LG: pp ) general principles of adjustments to option contracts, e.g. adjustment for a bonus issue (LG: p.2-13) outline the basics of taxation for options and warrants (R.8.2 and R.9.2) tax treatment of option premiums (R.8.2) the difference between investors, speculators and hedgers from the perspective of the ATO (R.8.2) describe the following aspects of warrants the basic features of different types of investment and trading warrants (R.9.1) meaning of ASX warrant codes (R.9.1) role of the National Guarantee Fund (R.9.1) risks (R.9.1) warrant conversion ratio (R.9.1) the different types of investment and trading strategies using warrants (Activity 9.5) describe the following client agreements (LG: p.2-32) ASX Option Client Agreement ASX Warrants Client Agreement EQUITY MARKETS EXAM STUDY GUIDE HO1-3

SOCIETY OF ACTUARIES FINANCIAL MATHEMATICS. EXAM FM SAMPLE SOLUTIONS Financial Economics

SOCIETY OF ACTUARIES FINANCIAL MATHEMATICS. EXAM FM SAMPLE SOLUTIONS Financial Economics SOCIETY OF ACTUARIES EXAM FM FINANCIAL MATHEMATICS EXAM FM SAMPLE SOLUTIONS Financial Economics June 2014 changes Questions 1-30 are from the prior version of this document. They have been edited to conform