The CA Final AFM May 2026 exam paper contains a mix of new but doable questions that test fundamental concepts from the study material, including real return calculations, NPV with real options, portfolio standard deviation, currency swaps, and option pricing models. The instructor emphasizes that while some questions appear new, they are conceptually covered in the study material and can be solved with thorough conceptual understanding. Approximately 80 marks out of 114-116 total marks are considered easily doable for students who have attended regular lectures and revised thoroughly.
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CA FINAL AFM May 2026 Exam Question Paper Analysis | ICAI | Detailed Discussion |Ajouté :
Good evening friends. So we are going to analyze the CA final A from May 2026 exam paper and those who have the group two exams pending. Okay, it is recommended to skip the video and not watch the video now. Later on you can watch and those who have finished their group one examination they can watch the video. Now in this video we will try to analyze the paper without having any biaslessness and we'll also discuss okay the strategy uh by which we can tackle these kind of conceptual papers in the upcoming examination right so let's get started now in the case scenario number one one by one we will move on now in case scenario one really speaking they have given all these things this question is all about okay the international fer effect the inflation effect real return and inflation return.
Okay. And capital gains adjustment is given is nothing but small adjustment.
Now this question is a totally new question. This question is a totally new question. I agree. See what I'm going to do is that each and every question I'm going to categorize new question but doable solvable question easily crackable question. Okay, that I will um tell you. See if you are allergic to new questions altogether. If you feel that okay the out ofbox question very tough question. If you rank the question paper based on just the new questions okay then it is totally biased. I feel this is my honest opinion. See at CA final level as a professional. Yeah. Okay.
Using the concept learned concept some new questions are being coined. You should not be allergic to new questions.
So it is not at all in covered in study material not at all covered in any kind of source which means new question is being tested. So out of box question no first of all understand my way of analyzing. Okay. If the question is new, I will try to find out whether the concept is discussed in the study material or various other questions. If they have combined two or three questions together, we will see that if concept is already discussed. Now, okay, we have already practiced in some other question which means it shows that the question is new but the concept is already covered doable only easy easily doable if you are thorough with the concept. This question okay this question is all about simple basic return computation. real return nominal return 1 plus nominal return is equal to 1 plus real return plus 1 plus inflation okay the international fer effect you can simply uh do this this we have covered in IFM marathon also one or two questions regarding these okay we have covered there so this question is all about that very simple I'll just give you an example by seeing the question students fear but normally what happened okay this question if you read out the question see here the government of India issues a 5year sovereign gold bond at issue price of 5,000 per gram purchased 200 g. So 200 into 5,000 okay you'll get what 10 lakh five lakhs and yes 10 lakhs amount plus this is the initial invested amount in this instrument whatever it may be okay sovereign bond okay the bond carries a coupon of 2.5% I told you any instrument will give you return okay by by way of two sources you can earn a return one is the interest or coupon portion or other is capital gain just like your normal bond this happens now so calculate a simple interest on initial investment interest payable annually so which means for every year the bond maturity is what five years see five years a bond maturity period So bond bond every year they will pay you interest 2.5 2.5% interest on this 10 lakhs and apart from that you will gain you will get a capital gain if any at the end of the um period or redemption at the time of redemption the bond will be redeemed with the prevailing market price of the gold the annual interest received taxable at the investor's applicable margin any capital gain arising on red taxable 20%age after considering the indexation benefit the inflation rate during the holding period is assumed to be 4% per see in this question my dear friends what they are saying see they are They are asking us to consider the indexation benefit sir but just like in your tax paper they have not given any index now don't worry the index is actually computed based on index is nothing but a compensation for the inflation okay the index which you are here they have given the inflation rate okay which means you should consider inflation to to figure out the um indexation adjustment are you all understanding so let's take that an investor JK purchases 200 g at 5 5,000 the investor falls in 30% bracket inflation is 4% what are the post tax annual interest income and the approximate real post tax return on initial investment. Huh? See what they are asking 25,000 25,000 is the total interest amount. If you see 2.5% into 10 lakh 2 lakh 50,000 uh 25,000 will be the interest. This interest amount is pre-ax. Now convert into port tax. So 25,000 into 1 minus 3.7 30% tax bracket.
So 25.7,500 will be the post tax interest income.
Are you understanding this return is nominal return or real return. This is nominal return yet real. See this return is nominal return generally. Okay. What they're asking now if you see this this a post tax annual interest approximate real post tax return if normal nominal return is there as 17,500 divided by how much? 10 lakhs. Okay take your calculator I'll just take it or two computations I'm not going to all the computations which is 17,500 divided by 10 lakhs.
1.75%age are youall getting 1.75%. This 1.75% is a nominal return and not the real return from the investment. Which means it will include inflation remove the inflation effect. Are you understanding? So which means this is the nominal return. So 1 plus nominal return 1 + 1.075 means 0175.
Okay. Is equal to 1 + real return plus 1 + inflation rate which is 04. Okay. 4% inflation. So 1 + real return is equal to 1 0175 divided by 1.04. If you do this, you'll get some something around 2us 2.16% or something like that. Okay, round it off to 2.25%. I'll tell you what they have done and there there is a mistake.
Anyway, that's what I wanted to communicate here. See if you see here the the real return comes to the correct answer should be B minus 2 um 25%age the post X. See this is not marked by me.
Don't think okay whoever sent me the question paper they have marked me uh this mark the solution. So minus 2.25 should be the solution. Why? Because what they have done I'll tell you they have told approximate simply what they have done 1.75 was the nominal minus 4%.
Okay what they have done uh it is not correct anyway. Yes minus 4% that that should not be there. 1 see 1.75 simply what they have done now 1.75 minus 4 2 okay 25 like this they have done it seems okay 2.25 but really speaking conceptually the international ferial effect will come into the picture and real rate should be found out after adjusting the inflation like this the calculation should be like this and you should get 2.16 but anyway the other option are nowhere near to that so hence okay 2.25 25 and also they have asked approximate so I think they have calculate just reduce the four percentage if you are conceptually strong you can easily find out what they have done are you understanding this question okay I have got a lot of messages and to be honest this question there's nothing to be discussed at all easily can be found if this question is difficult to you then it means that you are not conceptually thorough okay I'm being blunt in my assessment being very honest okay unbiased opinion I'm giving but I'm saying that something which is already covered in my lecture or something already I discuss the concept new question only new can but you can easily manage that's what I'm saying this question is easily manageable next part I I'll just prove you one or okay three or four questions I'll just discuss then you can believe me not now you can believe me after some time see after 5 years the gold price becomes 6,800 per g inflation is constant 4% what is the index cost of acquisition tax see they are asking two things one is index cost of acquisition alone and taxable capital gain very simple take your calculator here what happens gold price turns out to be 6,800 on the vual after 5 years right so what happens cost of acquisition initially what are the 200 right what what was your cost initial cost 10 lakhs now see very simple initial cost was 10 lakhs let's first find out what is the initial cost of acquisition initially 10 lakhs you acquired this was the cost now what they say inflation is 4% annually every year 4% you add inflation okay is a parameter to find out the indexing that's it so very simple 10 lakhs into 1.04 into 1.04 into 1.04 into 1.04 into 1.04. Yes. 5 years. So 5 years into 1.04. How much is that? 12 lakh 16,652.
So I got index cost of acquisition as 126 653. Agreed. No real computation.
Easy. Next the cap taxable capital gain.
Accible capital gain is nothing but okay sale proceeds minus okay the sale value capital gain you have studied under income tax minus cost of index cost of acquisition right you will get the taxable capital gain taxable capital gain now you see sale is what 6 6800 this number you keep in mind 6,800 into how many grams you um how many uh grams you purchase per g 6,800 200 g into 200 13 lakh 16,000 is the sale value 1360 13 lakh 60,000 minus okay you apply the uh what is that 12 lakh 16,000 126 653 1 lakh 43,347 D should be the answer are you all comfortable next assume the sovereign gold bond redeemed at 6,800 per g 30% tax black what is the net amount received after capital gains tax with 20% indexation very simple see after 5 years 6,800 would have been the sale value into 200 will you receive the entire thing. No, you will re you this is the sale proceeds minus I will have to pay the capital gains tax. Are you all understanding? So net amount net proceeds only you will receive after tax. But this capital gains tax will be computed on which amount this 1 lakh 43 347 taxable capital gain the tax back is 30% but this is specified income now capital gains what is the applicable tax rate? 20% is the applicable tax rate which means okay you will apply the 20% on this taxable amount 1 lakh 43 347 into 20% how much is amount 28,669 this tax 28,669 this you reduce from what 6,800 into 200 sale proceeding 6,800 into 200 how much is that 13 lakh 60,000 13 lakh 60,000 minus 28,000 669 how much is that 13 lakh 31,300 are you understanding help Is this question new question but easily scorable? Six marks. Nothing great in the question.
Okay. So I will not consider this question to be a question or something.
Okay. The easy straightforward question.
Next to come to the question number two.
Now this question is also easy and straightforward. I'll tell you the reason one by one. I'll tell you the reason. See conceptual but still easily manageable. Newm limited. The question is about real options. The question is about real options and some basic time value of money. Basic time value of see what happens. This company is leading chemical manufacturer based in Tangana.
Installation of new generation solar power plant to meet the energy needs of its primary manufacturing unit. This initiative is a part of new gyms long-term sustainability cost reduction goals. The total cost of installing the solar plant is 3.2 crores. Okay. Based on the current, this is nothing but discounted cash outflow. This okay discounted cash outflow. Now this question is a combination of NPV and you have the capital budgeting the real option both will be combined and some basic question. Okay. Nothing great.
Based on the current state electricity tarif the plant is projected to generate savings in electricity to 25 lakh per year in perpetuity I'll come back to this later one however there is a regulatory uncertainty a new state government is expected to take office in one year and is anticipated that electricity tariffs will be revised based on industry analysis the annual savings of could change to one of the two possibilities so they have given the two possibility okay this is upper FSB I told real options okay risky neutral model they are asking real options based on risky neutral model. Okay, I have covered in the marathon also I also specifically okay mentioned this is very very important for this attempt and here the low savings you know lower FSP 15 lakhs is the lowest savings and that two in perpetuity I'll tell you what is the issue here in scenario two high scenario this is upper FSP they have given lower FSP first and then upper FSB no issue 40 lakhs per uh per year and that also uh till perpetuity it will continue till perpetuity which means what they say you have today invested 30 how much crores you have invested here 3.2 cr 3.2 2 cr you have invested right this you invested now after 1 year what might be the situation now it may either generate upper fs 40 lakhs peranom till uh to till infinity till infinity or it may generate 50 lakhs peranom okay peranom till infinity are you all understanding two different data given now the company l given and risk-free rate of given 10 years government bought 6.5% RF rate okay for real option see one by First we will see the question requirement of the question then we will start okay see new chimp limited telling person to invest 3.2 2 cr okay anyway know that 25 lakhs in perpetually the v is 9.5% after 1 year 40 lakhs 50 lakh same scenario no issue what they're asking calculate NPV if invested today and NPV after 1 year in both the scenar they're saying NPV invested today NPV after one year both the scenarios we need to find out NPV what is NPV I have discussed in detail in the marathon video itself okay this is why I discussed from the basics intermediate question okay this is not even final level question okay see why I'm saying the NPV is what discounted cash inflow minus discounted cash outflow. Okay, now discounted cash outflow I know that it is 3.2 cr. Okay, which means what is that? 320 lakhs. Are you all understanding? Now discounted cash inflow I need to find out now either tell me children how to find discounted cash inflow I have two possibility for a discounted cash inflow which is 25 lakhs is there 40 lakhs is there upper end it may generate 40 lakhs to infinity lower I I will show you what happens conceptual but easy only I'll just show you what is happening here see you have two situation here 3.2 2 cr is there upper FSP 40 lakhs. Okay. The 40 lakhs to infinity. This is from year 1.
Year 1 it will generate 40 lakhs. From year 1 every year it will keep on generating 40 lakhs. 40 lakhs. 40 lakhs till infinity. This is one possibility.
Upper possibility. Okay. Favorable position. Lower end it may generate.
Okay. What is that? 25 lakhs or what they have given 15 lakhs. 15 lakhs. Till infinity. Are you all understanding?
Every year 50 lakh. 15 lakhs. 15 lakhs like this. every year in now very simple this is nothing but your time value of money till perpetual you have to find out PV of perpetual cash flow present value of perpetual cash flow is nothing but cash flow divided by R my dear friends this I cover in time value of money basics of okay I cover you go to my any of my intermediate students they will tell you okay they they okay I cover the time value of money intermediate for 4 hours or 5 hours okay at CA final level I still I assume that everyone would have forgotten I gave Again I cover for 3 hours. Ask anyone. I cover time value of money for 3 hours the basics and I would have discussed this present value. Perpetual cash flow.
Cash flow can be seleated into four.
Single cash flow, multiple and even cash flow. Okay. Annity cash flow, perpetual cash flow, perpetual cash, how to discount, compound, perpetual cash, all these cash flows, different cash flows, everything I would have discussed. Okay.
To this is nothing new. Which means the 40 lakhs I receive from year 1 to infinity. If I discount and bring it to present value terms, it is nothing but okay. 40 lakhs what is the rate of return this you should discount using the uh okay what is that what is the V given in this question see what is the I I'll come back to this later see what is the back given in the question 9.5% are you all understanding here 9.5% till perpet Yeah, please tell me. Okay, here they have given C.
Yes, 9.5% till perpetuity discount it please what is the cash flow 40 lakhs 40 divided by 1 divided by 9.5%.
421.05 lakhs or 4.21 crores are you all getting this? Okay, this is nothing but 40 lakhs divided by 9.5%. How much is that? 421.05 lakhs or 4.21 21 crores you can mention.
So upper FSP the cash flow is 421.05 lakhs are you understanding every year it can produce 40 lakhs to infinity how to find out present value of this present value of perpetual cash flow is nothing but cash flow divided by R basic thing here also present value 15 lakhs divided by R 9.5% how much is that 15 lakhs divided by 9.5% 157.89 89 lakhs. Are you all understanding what I'm trying to say?
Upper FSP 421 uh 05 lakhs. Lower FSP 157.85 lakhs.
This you get the cash flow. Are you all understanding? This is the cash inflow you receive at the end from the year.
Okay. This is calculated at the end of year 1. Okay. This is year 0. year 0.
This is year 0. Today, which means this is today. This is the cash flow at the end of year 1. Are you all understanding? Which means if you discount all the future cash flows perpetual cash flows to bring it to present value at the end of the year 1 you will have 4.1.05 lakhs value at the upper FSB lower FSB you will have the value of 157.81 lakhs. Are you all understanding my difference in this is to give you an example. Now you may ask where I have discussed this present value of uh perpetual cash flow. I'll just show you now can you see this? I'm just showing you that I have already discussed this.
This is okay comprehensive revision series. I put time value of it. Okay.
And you won't believe it. See here I I've just show I will just show you I've given the time stamp also. See notice this. Can you notice this? Okay. Present value of um level perpetuity cash flow at 1836. Go and verify. Okay. There are two types of perpetuity. Level perpetuity growing perpetuity d1 by k minus g which you use the formula. Okay.
Growing perpetuity I have discussed in the basics. So these are basic things.
Okay. I don't need to say this question.
They have found they've asked us to compute the NPV in which case discounted cash inflow. Okay. Um comes to how much discounted? See what they are saying? Uh and 25 lakhs in perpetuity. This is annual savings without the probability.
Now this is 40 lakhs and for 15 lakhs we found out the cash flow value. Now okay present value we found out. Now for 25 lakhs is the annual savings they have given up for 25 lakhs. See what happens.
25 lakhs divided by um what is the back here? 9.5% it comes to 263.15.
This is the discounted cash inflow. Are you all understanding what I'm trying to say? But this key is discounted cash inflow is how much? This much. Disco is how much? Discounted cash outflow 3.2 cr given in the question or 320 lakhs which means 263 minus 320. How much is that? - uh 57.
Okay. Rounding off issue minus 57. This should be the NPV today. Are you all understanding? This should be the NPV.
But apart from that they've asked NPV okay to invested today and NPV after 1 year in both the scenario. Okay NPV today and um yes calculate NPV if invested today and NPV after 1 year under the both the scenarios after one year under both the scenario. See here after 1 year also they asked us to compute the same discus. Now what happens see after 1 year I told you upper FSP value will be 421.05 05 lakhs lower FSP value just now we found out now what was the value please tell me 157.8 okay 181 counting of 157.81 157.81 now tell me children what they have done this 421 okay 4.21 like that they have taken 421 4.1 crores line amount in cr so 4.21 minus um what is that 3.2 2 discounted cash outflow 1 uh 01 1.01 higher end what is the NP and lower end what is the NPV how they have computed okay 157 or 1.57 let me take because 1 1.57 crores minus what is the value 3.2 how much is that 1.62 62 or 63 the rounding off issue this should be the correct value. So 0.57 high this low. So C is the answer but there is a mistake here.
What is the mistake? The mistake is that after one year you are computing the NPV the NPV really okay yes this discounted cash flow is after one year both the cash flow stream if you see this is after one year when you are computing NPV net present value okay it should be discounted and bring it to present value terms you should bring it to present value terms. So disk minus disco this is really speaking these both both these cash flows are not comparable ideally the 421.05 you cannot reduce directly from 3.2 lakhs and 157.81 81 you cannot reduce directly but anyway this is what they have given so we are considering are you all understanding what I'm trying to say okay this to show you in the entire discussion tell me children is something new already discussed already discussed nothing new a combination of time value combination of basics and capital budgeting okay if you are conceptually thorough with this it should be easily solvable there is no doubt about it okay now now next question also you can see three quarter plan after one year savings should be 40 lakhs or 50 lakh or we know risk-free 6.5 Using risky neutral valuation compute returns in both scenarios and risk neutral probability of high saving scenario. First they've asked us to compute the returns under both the scenario. Now how to compute return very simply yeah you see 40 lakhs is this 15 lakhs is this which means here I invested 3.2 cr after 1 year it became 4 you should not take 40 lakhs this wrong way to compare 40 421 what is that 4215 and 157.89 89 lakhs. Are you all understanding? If this is the situation, you tell me. From 3.8 cr you invested 3.82 cr and it became 4.21 4.2 cr or 421.05 lakhs. How much is the return?
Very simple. 4215 divided by 3.2. How much it has increased? So 31.5%. This increase is 31.5 78 or five. Okay. Six. They have given five six as option. So the rounding of 57 percentage. Let me take 57. It is 56 or 57. Are you understanding what I'm trying to say? This is the upper end.
Now lower end you tell me the return will be negative or positive. From 3.2 cr you invested your capital loss here became 157.89. How to compute? See this can be computed now. How to compute this return? 421.05 minus 320 divided by 320. This will give you upside return. Okay. The uh end return end value minus opening value divided by opening value will give you return this percentage 31.5 into 100. If you do you get 31.5%. Are you clear?
Next figure. Now how to compute the lower value? Very simple. 3.2 cr. From there it dropped to 157.89 divided by 3.2 cr. If you do you'll get 50 93 percentage. 50.93. Okay. Roughly you can see they have given 50.63. Yeah. The rounding of issue. Okay. 31 uh 57 and 50.63. Both of this is given. Are you all understanding? to confuse which means you need to find out all the value to be correct. So let's say the last one risk neutral probability of high saving scenario which means upper FSB risk neutral probability of upper FSB they are asking so we already know the formula this okay without continuous compounding I told you 1 plus R raised to the power N minus V divided by U minus V is nothing but okay lower FSB down FSB divided by spot okay go and verify the marathon I've discussed everything here okay there down FSP what is the down FSB 157 89 are you all understanding this is down FSP now divided by spot price spot is not initial investment of what is that amount 32 if you do this you'll get the down FSP value 15789 divided by 3.2 uh 320 which is how much 49.34 so this is see this 1 plus risk free rate risk neutral model you should take risk free rate so 1.065 065 minus.4934 divided by U. Okay. U is upper FSP. Now again upper FSP divided by 421.05 divided by 320 1.31 1.3157 minus.49 34. Okay. If you solve it you will get how much? 69.5. Are you all getting this 69.5? You will get the solution. A is the right answer. Are you all understanding? So this is to say that this question you tell each what are all the things which required to cons the question. First you need to know that okay the NPV should be discounted using VA first of all. Secondly here the uh upper FSB and lower FSB which is risky neutral model you should be thorough with the risk neutral model.
Then real option how it works that also you should be thorough with. So if you have the conceptual knowledge easily it is solvable. I will never agree this question. Similar type of questions are there. Okay. Okay, I will never agree this to out of box question. Nothing is there. And this question also last question also I don't want to again discuss. Okay, present value now NPV only get present value we'll find out present value of risk-f free rate if you discount and bring it to present value terms you'll get 1% value back if you discount they asked both ideally risk-f free rate only should be uh back should be used for finding net present value risk-f free rate for the finding the scenarios okay that is the risk neutral probability you will use so anyway they have asked us to both compute NPB using risk free rate as well as back okay easily solvable are your understanding I don't want to discuss in detail is very simple and straightforward so case two also I will not catey is out of box or very difficult and all everything is doable only. Next case number three okay is a study mat uh theory theory given theory questions and all are not from outside the syllabus okay mostly not outside the syllabus in the sense the numerical question you are getting troubled okay the case study uh type of question which are theory based question it is already given okay there is one paragraph in your institute module you can see okay where they have given how to protect the you know the hostile takeover the mergers and acquisition this chapter various strategies are given okay the poise white knight poison pill po po po po po po po po po po po po po po po po po po po poison po everything is given okay the theory portion given in the study material only so nothing new you can score easily um if you have revised it okay and I'm not saying most probably many students will skip the theory portion so I'm not discussing anything about theory okay but available in the study man that is known thing now come to the fourth case scenario simple V question which I already covered in the marathon also V question what all the adjustments I'll tell you what they are newly asked I'll tell you this is not new easily understandable only from the question itself see what 25 lakhs is the total amount. Okay.
Portfolio V which means individual security alpha is there one security beta is there. Two security alpha and beta 60 is to 40 is a proportion or weight of the security. So weight 1 is 60 weight of alpha is 60 weight 2 is 40.
Like this they have invested and you have also given the correlation. Are you understanding? So portfolio V form I told you total investment amount. Okay.
Into you have the capital now investable amount. You take the investable amount then you have the standard deviation.
Then you have the standard deviation.
What is that? If the see in this question they have given the portfolio which means you should find out the standard deviation of the portfolio. If it is individual security you'll find out the standard deviation of the individual security into the standard deviation of the portfolio. Okay?
Because I want to find out the value at risk of the entire portfolio. So I'll compute the standard deviation of the portfolio. Then you have into this will give you okay total volatility total um what is that? This is a volatility amount. Are you understanding? which means the um alternative of the value amount of value which can increase or decrease like this or on into what do you do okay the z score I told you at varying confidence level 7 question will mention you 95% confidence level 7 90% confidence 99% like this Z value will be given at 95 in this question 99 a z score 99 and 90% given assume 99% let's assume like this you will find out the v for one day this will give you v for one day into root of t which means into root of Number of trading days will give you overall VR for the selected period. Are you all understanding? So port very simply individual security. Now you find out the securities individual risk standard deviation. If you want to find out the rare of the entire portfolio, you should take standard deviation of the portfolio. How to compute standard deviation of the portfolio? Should I need to teach? Okay. The square root of okay W1 square sigma X square or in this case sigma alpha square X square. Okay.
Plus A + B the whole square. The formula I told you. See w2 square sigma y square plus 2 into w1 w2 sigma x sigma y into correlation of x and y this formula you will find out first to find out the standard deviation then apply the formula easily find out the solution there is nothing to be discussed okay what is approximate v in rupee terms at 99% confidence level usually you can find out I got 9 527 just discussing what is approximate diversification benefit this is the key see this question students ask me what is that what I mean by diversification not the regular students yeah those who have attended my regular lecture they will know easily diversification I cover for 2 hours of the portfolio management even the revision video you can check it in the freely available in the YouTube the way with okay the the conceptual clarity you will have in the portfolio management chapter okay you can easily manage all these things what is the diversification benefit I'll tell you briefly see there are two security in this case alpha and beta now alpha beta so there are two security now if I individually invest in alpha or individually invest in beta Okay, which means say if I individually invest only in alpha, I will have some value at risk. Say the value at risk comes to 5,000. If I only individually invest in beta, I will have say value at risk 2 3,000. Which means if I invest in alpha, I may lose maximum 5,000. If I invest only in beta, I may lose maximum 3,000.
If I invest individually in alpha and beta, I may lose okay overall how much?
8,000 rupees. Are you all understanding?
So cumulative VR total V if I invest in alpha as well as beta will give you total V. This is when I don't go for diversification. This is when I don't create a portfolio using in some proportion the alpha and beta. Are you all understanding? If you individually go for alpha or beta this may be the total V. But if I include it in portfolio, if I include it in portfolio, what is the total V level? Are you all understanding? So individually you'll find this is the VR, this is the V. The differential amount is what they're testing. Okay. Okay, the diversification benefit that differential benefit arises due to diversification. Put it simply if you find out individually alpha standard deviation you will have the standard deviation of alpha beta. Now you will have standard deviation of beta. Now what we did this got replaced with portfolio standard deviation. Portfolio standard deviation has the correlation effect because of the correlation will happen all this okay I have discussed n number of times in my lectures. Okay. If the correlation between stock alpha and stock beta increases from 6 to8 simple same question portfolio uh standard deviation you replace into correlation of x and y the formula is there root of w1 square then you just replace the correlation number 6 okay with 8 you'll get the solution revised to v okay v will increase by decrease by which means existing vis at 6 what was the v you will find 8 what is the v what is the differential amount it will increase or decrease you find out simple straight forward Third question. Next question. Case scenario five. Fate of forward contract. That also I put under the important category.
I did not discuss the question because I put a separate video for that and I told that many times it is important. Okay.
In our group. So I told um this to be seen that is why okay this fate of forward contract if you see the list also I've given the fate of forward I I'll just show you okay if you don't believe me this this is what I gave you in the important portion. I'm not saying okay I'm not not boasting because they have tested from important segment. No, not like that. But I'm saying that you should have been studied these things.
You should have covered these things.
See here where it is fate of forward contract with all the adjustments I okay in a separate video also you can go through anyway that is there. Then you have uh so this question one only one catch okay few students ask me sir green agro exports limited what kind of doubts I'm students are asking you tell me frankly the green agro exports limited given s import payment due given sor import confusion as export oriented company given import what is this okay I don't understand the doubt it because see export oriented company yes this is export oriented company okay will I not import you understanding I export finished goods here I I may import raw material right even though the export oriented company need not import at all no for my import exposure I may go and buy the foreign currency dollar two lakhs are you all understanding so that was one of the confusion one of the question asked by students since I'm sharing here so obviously whatever given whatever is the transaction with the dealer you have to consider here for my why why I'm going for this forward contract hedging what for what transaction I'm hedging here for the import transaction yes for import payable Payable amount is 2 lakhs. Now what I will do? I will buy the US dollar. So I'll go for the dealer and try to buy US. So what is the transaction the customer will make by forward what is that 3 month January 1 okay February March April 3 months forward contract. Are you all understanding? Jan, February, March.
Yes. 3 months forward by I will purchase the rates and all given different rate.
Okay. You should never be confused with this rate hundreds. Okay. Many many times even in marathon I have covered from the basic. This is the real reason in the forex chapter 8 if you know how to interpret the rates properly pick the rates appropriate rate that's it okay and bid ask everything 2 months for month how to close it how everything is available I need not discuss this go through now come to the descriptive portion my dear friends here first question okay is about the currency options and see the currency uh swaps is given the question regarding currency swaps which I discussed in the marathon also I'll just show you what is the adjustment they have combined two questions and they've asked us one single question. Okay, see I'll just read it out. Bat infrastructure a premium Indian engineering has been invited to establish operating highfield data center. See Indian company is there Bat Infrastructure Limited. This invested in a foreign is going to invest in a foreign uh okay what is that?
Valoria. Okay. This is Valoria country.
Okay. Now this is India and this company wants to invest in the foreign country.
See here what happens how much it will invest now it will invest it okay it was 4,000 million valance because okay you want to invest in a foreign country their currency you should invest are you understanding now for that the government okay the government of Valeria what they say guaranteed amount of 8,000 million sale price they are offering which means very simple what they're saying now today you put 4,000 million valer valer what I will give you I will give you guaranteed 8,000 uh million of valor in return. Are you all understanding? Okay. Now, this is what is the agreement with the uh in return at the date of uh at the time of maturity which means you undertake see you spend 4,000 million uh wellers and undertake the project after this many years. What is that? Um given how many four years after 4 years I will give you a guaranteed sale price of 4 8,000 million. Guaranteed a sale price of 8,000 million. This is also foreign currency. This is also foreign currency.
Are you understanding? This is the initial cash outflow. This will be the cash flow redemption value. Just like redemption value at the end of the period. This is one part of the question. This is new adjustment. No issue. That is also easy to do during the four year operation period. BI will provide technical maintenance security annual fee of 80 million. Okay. Payable at the end of the each year. This will be your outflow when you want to evaluate the project. Ultimately you want to evaluate the project. Okay. This is nothing but NPV based question. NPV based question. You are investing. So you'll have discounted cash outflow.
Then annual cash flow. Then there will be terminal cash flow. Okay, I everything I have discussed in the math.
Okay, see here uh now to hedge this okay position current initial capital with investment bankers proposed to currency swap agreement with the following terms.
Okay. Currency swap agreement BA will stop the principal portion okay for Indian rupees immediately at today's spot rate they will happen this see for the exchange rate to be taken they are giving this detail like this you should understand so it is not a full-fledged question regarding currencies I'll tell you what happened here 4,000 million year zero you convert it using spot rate what is the spot rate given the question now exchange rate spot rate given 50 rupees so 50 rupees yeah 4,000 million into 50 okay discounted cash inflow okay this question they want you to compute about NPV based on home currency approach. based on home currency approach. Okay. This 4,000 you will convert into 50 you will convert this will become your discounted cash outflow initial year zero. This will become your outflow. Are you understanding? Next.
Okay. This swap will be reversed at the end of year four with both the parties reexchanging the same principal amount at the same spot rock at the inception.
Inception my dear friends what they say the swap is a juju piece. Actually speaking a bogus swap. What a swap. Now see there is no risk involved. Yeah.
4,000 million is there. This 4,000 million 50 rupees I pay you. Take your calculator. How much is the 4? 4,000 million into 50. Say how much million? 2 lakh million is there. This 2 lakh million. Okay. I pay you now the at the end of the fourth year. What happened?
Okay. Both the parties same principal amount same spot rate 50 rupees at the inception 4 million 4,000 into same year 50. Okay. 2 lakh million. Are you all understanding? Which means it will be out. See it is like working capital adjustment which you do now this I don't understand are you understanding what I'm trying to say in the NPV computation go and check it I would have told I would have told this I would have told you like initial cash outlay annual cash outlay and terminal cash okay here what happens this is like working capital 4 million you invested then it will be recouped you will be getting back the four 4,000 million in 250 Indian rupee so initial there is no risk your risk is not at all there are you understanding you are not at all hedge exposed to this currency risk. Okay. Now the bank will change an charge an annual uh uh facilitation fee of.3% calculated on princ rupee principle amount rupee principal amount every year outstanding principal amount payable at the end of the each year this.3 percentage okay I'll be now sir what is the rupee principal amount very simple here okay the problem is see what happens see the rupee principle amount now how you should apply this will be your outflow first of all the special uh facilitation charges will be your outflow The.3 percentage will be rupee outflow very simple 8,000 you apply under swap this will be okay added initially and it will be canceled out but normally what do you say the every year you should apply the for spot right now say today what is the amount 4,000 in terms of Indian rupees you lak 2 lakh million cash outlay next year one lakh what happens okay the four what is that 4,000 million okay you should apply the 53 you should apply the remaining forward rate are you all understanding which means 53 three rate for the year one you will get the INR outflow now into.3 percentage you will apply like this you need to find out okay this is the point now like this you will find out the inflows in terms of INR now in the rand question African rand question I'll just show you both the question okay they have combined both the question there there also we used home currency approach but there we computed forward where interest rate were given in the both the for both the countries we computed forward then we discounted okay using the Indian discount Accounting rate find out the NPV are you understanding this is international financial management question they have combined with currency swap but if you are thorough with both the concepts easily doable I will not consider to be out of box question just because they have combined two concepts are you understanding now where they have this second year cash flow should be discount you know converted using second year rate third year fourth year then present value factor all the cash flows respective discount and bring to present value term discounted cash inflow minus discounted cash outflow okay you will get the value sir the fourth I'm receiving 8,000 million from the bank government 8,000 guaranteed 8,000 million 8,000 yes 8,000 million guaranteed from the government at also you should discount and bring it to percent value terms to find out the inflows are you all understanding outflows inflows discount find out the present value NPV if the project is viable do it okay there's riskadjusted discount rate given now home currency approach the 14% okay what do you do you all the cash flows are in correct foreign currency convert the cash flows here every year cash flow convert it to um INR using the respective rates spot rate and forward rates after converting here you don't even need to compute the IRP because forward rates directly given after converting find out the discounted cash flow minus out NPV in terms of rupees home currency approach okay now I will show you what they have done really in this question okay both the questions I have covered in marathon okay and both the questions they have cumulatively tested see I what can I do I did not expect I don't want this to happen but anyway I'm saying this is not totally alien if have thorough with the concepts, you should have been comfortably doing these questions. See, take you to the international financial management. I'll show you the options once you finish this. Um this is what I told you. Nominal rate, real rate, all these are there. I told you now. Okay. I've computed um investor in exchange rate parity. Yes. This this international ferial effect. Okay. Real rate, nominal rate. I've discussed this.
That's why I told you I've already discussed the marathon also. You can see this US dollar appreciates, depreciates.
Okay. Anyway, now can you see this um question number?
Huh? This question African question.
Yes. Yes. Okay. This question you see, can you see the cash flows? Cash flows in African rank. This is given and they have given the okay spot rate and they have given the interest rates and they have asked us to compute the forward.
Are you all understanding? Exchange rate uh here purchasing power parity because inflation interest rate given IRP exchange rate given um inflation given purchasing power parity here these are all forward you convert the nominal real okay the nominal real question also adjustment is there because in this question they asked nominal real adjustment but in the real question uh the examining question they have not even asked the real nominal adjustment they have only asked what they ask now yes the cash flows okay home currency approach home currency approach What you seen this see the cash flow in rupee terms you convert all these in rupee terms then you found out the NPV NPV negative project marathon they have covered this question is there now this question they have asked that the adjustment regarding the currency swap they have taken from the tree question I told you very very important from interest rate risk management okay where the question yes can you see this this I have covered in marathon go through okay very very important I told you drill dip question what they have done here see just change the country just change the transaction But amount but if you see the transaction similar nature see US- based company had won a contract in India and the project will require initial 500 cr what they have done okay this 500 cr the US company put 500 cr here and the Indian uh government this 500 okay this 500 cr they will invest and this they will sell for the Indian government at 740 cr which means this US company will receive 740 cr in Indian rupee like this only in this question initially uh you invest How much? Um 4,000 million. 4,000 million. And the government um guaranteed amount is what?
8,000 million. Are you all understanding? Okay. This what they agreed to slap to reduce the exchange rate risk. Okay. Now uh and since the Indian pay amount in Indian rupee the currency about due exchange rate volatality. Okay. Assume that the Indian spot rate this risk. Okay. This part not I'm saying the transaction trans question. Are you understanding?
Now anyway I what to say if you are thorough with the concept you must beable here.
Next see this is what I told you. Next question is about okay what is that? Um H mode. Yes. Next question is about H mode. Okay. Now this question okay is not totally new. I have covered in the revision video. Okay. Okay in the equity valuation there is equity valuation chapter in this equity valuation chapter I'll show you just to show you that covered it I think I have covered H model see this can you see this at 2 hours 2 minutes H model for valuation for 15 minutes I have discussed briefly what is H model formula and I also discussed one question okay if you have done that question did to a copy paste question almost the numbers will be changed but almost similar question application of the formula nothing great here okay are you understanding so this also So I've done it. So for my regular students, this would be no surprise. H model I've done in class for 1 hour or what? Okay, I have covered the H model.
Next C this is one C. Okay, this is a theory based question. Okay, they've given the numbers but idea is to as a credit to explain the key concerns regarding the loan request sgest to alternative course of action available to the company to achieve a sustainable growth. Okay, theory portion the material study man is there but uh they have given like a case study. So anyway this I can't comment on anything if you have studied you would have done you could have not any next is question number two 2A is a third that also I covered in the marathon and I told you is a very very important for this setup are you all understanding so again they test when they test okay these kind of questions inevitably see one point is there in this question you may ask can you see this this is what okay you have to be conceptually strong here evaluate whether security x and security where correctly priced under two factor arbitrage pricing theory model. Now they're asking correctly priced very when you see two securities are there.
You will apply the AP formula and find out the fair value of the security. Now you will compare with that quoted price actual price. Are you all understanding there are two methods to find undervaluation over valuation. Find out the fair valuation based on this required rate of return based on AP or CAPM or any other aspect to find out fair value. Then you compare with actual uh quoted price. then you say it is securities undervalued or overvalued right but in this question what happens they okay they are there there is no quoted price given are you understanding but now that's why I say I have detail discussed okay if there are two ways to actually find out undervaluation over valvaluation very simple the or capm the rate which you're finding now that's the difference between expected rate and the required rate of return many times I told in the portfolio management so there is two rate this is K The K is called as required rate of return and never the expected rate of return interchangeably used by the institute and so many authors wrongly used as K mean okay required rate of return always remember the K means not expected equal so expected rate of return means what mean return okay average return is only expected I analyze the past data and try to think predict the future based on past data and say this is what is expected from the security now I told you expected the portfolio management I have covered there expected return the security is undervaluation or over valvaluation based on expected return under CAPM portfolio management comprehensive I have covered please go through you can find out here what a using the APD you will find out the K as per APD now the required rate of return you will find out this you will compare with 14% of the security excit you understanding very simple yeah K as per the AP is nothing but lambda 0 plus beta 1 lambda 1 plus beta 2 lambda 2 like this I'll find out okay yeah this some number I will get this I will say it is coming 14% % exactly. So this 14% matches with 14%. Now it is fairly valued. If this required rate of return is coming as 16%, if your requirement is 16%, the security is actual or expected which means based on past data expected action is only 40%, not satisfying your requirement. Hence it is overvalued.
Hence it is overvalued. You will not buy the security. Okay. like this if it is say if the AP or the uh the KS for APD comes to 12% and the expected return comes to 16% which means the security okay I require uh after seeing the risk factor of the security I require 12% from the security but the security is giving me 14% which means I'm oversatisfied okay hence the security is undervalued recommended to buy like this undervaluation or overvaluation can be b found out based on the price or can also be based found out based on the expected return versus required rate of return I covered the concept nothing new and this adjustment okay the short selling and adjustment we do in regular lecture as well as revision lecture there is one question I don't remember um if I gave it no I did one small cap growth cap question then I did one normal question but it is institute module adjustment okay it is available in your practice institute study method okay I'm moving on part B of the question see part B question basic simple option question one adjustment may be new you may be okay that also is there but then I also don't used to discuss because see see many of the things what happened now I used to discuss many of the things in regular lecture but even I cons okay consciously cut off few discussion okay for example American option valuation of American option with the dividend if you can see the portfolio revision I put it but the point is since everyone is like h model if you see in one of the revision batch I would have covered in other batch I would have felt why is them covering these things for past 20 25 years they're not asking okay no question given in study mat also so why I I get frustrated I don't discuss okay accidentally they put in this at okay is not that I did not discuss I discussed it in even revision lecture also but I'm saying sometimes what happens sometimes I cut off the discussion because students also get agitated why you are discussing so much this is the problem the lack of consistency with IC is what I'm having the trouble I'm not having problem with asking these type of question why because I'm sure that if someone is attending my regular lecture will be surely and he's preparing well and not like in in a hazard manner if he's preparing linearly well for over a period of say 1 year or so okay regular students would do that over an article period okay you slowly attend the lecture regular lecture prepare for the examination if this is the case I'm sure that they would be able to easily answer this question the problem is that okay the problem arises when students suddenly expect everything to be discussed in one shot they want everything to be summarized okay the trend is also in student were also testing three times a year examination was happening okay the number of inquiries really speaking for my regular Regular lectures was far below than the revision lecture.
Everyone wants okay exam oriented batch revision batch but no one wants to attend regular lecture. Now if question is asked with this quality and depth if you don't have conceptual cloud if you don't spend 200 hours of time for a subject and okay expert level knowledge is expected at CF level okay and how can you do everything based on just exam oriented approach that also is one thing. Other thing is that many students attend from various faculty. Now I'm not blaming anyone but they are many students are even doing self study and then they are attending revision lecture. Now how can everything will be covered. So this is the inherent risk.
If you want to take risk then okay then I don't have a solution for uh revision lecture you can take. I I would never suggest just revision lectures but of course revision lectures you can take.
This is the problem though this question is also the same thing. Okay. I have cut cut few discussion even from my regular lectures because I thought it is redundant. Okay. For example, in this atom they've asked um sharp optim portfolio which I cover in regular lecture. Obviously I cover one and first I cover one big question tabular method.
I don't even go by formula approach. I show the tabular approach easily solvable. I show that in the regular lecture. But for for the past many years they never asked. So students are asking why you are time wasting why you are discussing these things. I also you know I don't have a answer for these questions. So luckily I did not remove it from my regular lecture. I discussed it. Jan 26 they asked the sharp optimum portfolio question and again the same question what I thought was they would not repeat the the same question which was asked for uh which was asked in Jan 26 okay they have repeated the same cut off the sharp optimum portfolio May 2 so what can you do you have to expect the unexpected I suggest students to have comprehensive knowledge prepare for everything worst case scenario but if student want to take risk now what I can do I have to help them out with some material revision material or or the marathon or something like that. So this is what I would request okay to generally attend a regular lecture if you have time or if you create time just by telling I don't have time for this I don't have time for this now no uh this is not an excuse and not having time is what is what is an excuse we want to pass by taking a shortcut and that is very underlay what is happening that's the lack of in consistency from IC1 because what they are doing if they are asking this level of question every attempt then students will also be fine tuned with that okay this is the standard I also have to prepare they would mentally prepared. But the problem is once they ask these type of question here thereafter for the next three years they never ask the difficult question copy paste simple dto copy paste question from the practice manual they put it and they ask question everyone okay Tom Bick dick and Harry even doing self-study everyone just focus on problem no conceptual knowledge they will clear with exemption 70 80 marks 90 marks they will score and then when these kind of paper and then they will tell blame the faculty oh what why is covering all these things in simple terms like you could have finished this is the issue so anyway these all the issues I'm also having. Okay. Don't think that just from the student's perspective you are having issue. I am also having issue because I don't know what you know I have to fulfill the requirement of the student. If someone comes and says I have only 80 hours of time I have to give him revision batch.
If someone says I want to learn deep okay I don't want revision batch I have to give them full batch. So ideally recommended batch is regular batch.
Okay. Yes, you're not I'm not uh here to to what market my regular batch or something but I'm saying if you want fullest knowledge deep knowledge in finance okay I can assure you that at least 80% of this question paper you could have solved easily if you attempted my that I can assure you I will show you even empirically I will prove you okay see here now let's continue discussing I don't want to deviate here see um question B here B case the simple option question see here the they have given ITM ATM what is this in the money at the Okay. Um out of money now this thing you would only know uh okay if you have taken my regular lectures I don't discuss all this in um revision lecture.
Now if you see this this they have given if you see if they give the full form of it it would have been helpful but they simply atm what is this? If a person don't have this knowledge they would never attend this question. Okay something alien nothing. Yeah I will tell you what it is. ITM now ITM means in the money now if you have having call option for a call option let's say call option for a call option when the call will be beneficial if you exercise when the future spot price okay or spot price let's say minus exercise price okay which means minus exercise price is positive which means if it is beneficial in very simple terms I'll tell you the the spot price say is 2,000 the spot price is say 2,000 the exercise price is 1,900 this is exercise price this spot price assume. Okay. Now which means if you even exercise today it a share worth 2,000 exercisable at 1,900 call worth 2,000. Okay. Share worth 2,000. Exerciseable 1,900. Now will you exercise? Yes, I will exercise. The situation where a call option will be exercised which means as a holder I will be in a beneficial position. This is called as in the money scenario. In the money scenario okay at the money means exercise price is equal to spot price both are equal. You are indifferent. Out of the money means okay for a call option exercise price is more than the spot price. No point in exercising a share worth 100. Will you exercise the right by paying 100? Will you write right to buy now? Will you exercise your right by paying 110 or or 200? You will never exercise. So it is out of money.
Call is out of money. Like this put option reverse will happen. Exercise price is more than the the spot price then put is in the money. Like this you need to understand basic thing they have asked. Okay. the part one you can easily find out but there are two parts the first is assess the ATM ITM OTM that is part one second part evaluate intrinsic and time value components long back I used to discuss this I don't even discuss in the regular lecture see in the next 3 months see a lot of time I'm taking I'll briefly discuss I don't want to hey um elaborate here I just want to briefly discuss I the remaining questions I don't want to take deep into the solution you can believe me now till now I have discussed why I'm discussing now to make you understand so You can freely believe me. Okay. Each and every if I say that there is okay, it will be covered. Now, it will be covered. Okay.
If the concept if it is not covered in regular lecture, I will openly say that.
Okay. It is new to me and I have not covered in regular lecture. So, no point even if you take the regular lectures or or this this cannot be solved like this.
I can openly say I will say anyway the second part of the solution in the next to 3 months expiry price may increase by 150 or may decrease by under each scenario. Examine which option will be rationally exercised. appraise the net profit or loss as per the contract. See this is again risk neutral probability you should apply next to 3 months expiry pay may increase 150 or may decrease now each expiry scenario which option will be rationally expired now this FSP minus X you need to find out at each n this I'll tell you this can be attribute binomial tree something similar to binomial tree concept you need to find out the two upper FSP value lower FSP value will it be the upper node and lower node American option one question is there okay binomial tree this also I did in the marathon if I'm not wrong okay believe me I have done the marathon also from this you can find out. Okay.
Next.
So here I can say two marks question I can say it is totally out of box. I can consider that. Okay. And at the end I will show you what is happening. Next this question easily doable easy theory question. Okay. From the start of finance you can do this question also.
Okay. The foreign currency approach home currency approach. Here also identify which option. Now what is the option?
Where you should borrow? Where you should borrow? This is the question.
Okay. Where you should financing option where you should borrow? Ultimately this is capital budgeting plus or next chapter international capital budgeting where you should borrow first part of the question ask us to uh yes where to borrow next adjusted present value covered in the marathon okay base case NPV and adjusted NPV go through it okay I have covered again in the capital budgeting part two of the marathon I have covered a concept called as base case NP adjust NP what happens now there I have covered yes I have covered discussed the concept also please go through base case NP you will assume that the cash flow the project risk is because The project risk is uh equity holders risk. So ideally you even though for NPV computation you will take back ideally it should have been K. So project cash flows you discount using all equity of the K rate then you will find out the um base case NPV. This is called a base case NP then you find out the okay the benefit derived from the debt okay tax shield arising out of the debt. Okay. So that is adjusted present value. This is the concept. Tax rate given that is right. Tax rate is given.
Are you understanding? So by seeing the question you have to question each and everything what why they have given what they have given all this will come come in the mind. Uh next mutual fund simple and straightforward question please go through. Okay that is not at all to be discussed. Dividend bonus again marathon I have put I have not covered it. I've I've given the question along with the solution the chanaka one of the question from the institute study mat. Okay. is really doable and holding period return versus the total return. Anyway covered in the uh separate video for mutual fund question. All the IC fundamental questions also I've discussed in the um YouTube channel. Anyways, NPVA this also okay regulatory issues in securization chapter okay securityization entire chapter is also important. I told you in theory theory they have tested anyway and this question okay this is a sharp single index model just now I discussed now okay the cut off point this point I I thought this would never be tested in may examination my mistake prediction gone wrong anyway and anyway I also tell students that never expect um okay even though I have put it expected questions you should always expect the unexpected okay and this is such type of question January question they have asked and examiners note also they have given I remember I read uh okay that um many students failed to answer this question properly. Hence these kind of questions they will enjoy putting it again anyway they put this uh this is this in regular batch I used to cover okay so I'm not considering it alien question or totally out of question because we have covered in the regular lecture thing just like black schools we cover that also hence um that question is there the B part is there new question okay and somewhat tricky question I would say computation but the the you know the way of framing the question u may lead to some is geometric growth rate there's nothing but caggr which I called as compounded annual growth rate okay which I discuss regularly in our regular batch as well as in the remission batch also. So CG is is is one way of computing the returns. Okay, the growth rate computation uh famously called a CG. Anyway, here they have given geometric growth rate. Excuse you.
I saw the same name where I'll tell you the same CAGR in the intermediate the cost of capital chapter they have given one realized yield approach question.
Okay. While taking the intermediate class I came to know there they've given the geometric growth rate. Then only I understood okay CAGR only they have calling as geometrical growth rate.
Anyway, this is what is industry. If you go to the industry there finance world okay stock market and all famously use CAGR cap okay compounded annual growth rate anyway the Elliot way theory wrong prediction okay the technical analysis I predicted there are two or three theories in that okay the Elliot way theory random walk theory all this there I predicted this time random walk theory will get tested my bad luck okay they have given Elliot way theory and anyway they have given Elliot way theory they wrong prediction my mistake next they have given this question okay this question caller I predtor interest rate risk management something floor and cap caller strategy may be tested but this question is totally out of the okay blue moon I don't know um this question why they asked I don't know but really speaking it is a very very tough question and it cannot be solved I believe if you know you have to uh think a lot and if other question are easy if you have done other question if you have half an hour time if you have attended regular lecture then you can think of it at least you can arrive at some number okay reverse working also they have computed very very uh good quality question but then they have to provide some sort of thing in material okay without giving anything in material they directly asked this is a zero rate what what is that what they have tested now really speaking zero cost to caller what what really happens here okay the caller uh we have done one question I'll just show you the question I'll show you and then I'll what happens in this question see the interest rate risk management we did one question related to last Question this question exactly. Yes. Yes.
Question number 71. If you see this question we discussed this remember.
Okay. This related to caller question number 71. The problem is that here the labor rate variable rate guy given and the okay the strike price obviously given for cap as well as flow and um yes this is given now what they have done in this question now see so cap and flow rate given for comparison and we compared it and found out the cash flow at each reset date remember there we found out one cap received or floor payment like this we found out agreed the point is what they're saying this question is also related to caller strategy but what they have done now okay they have asked us to compute the zero cost now which means the caller cash flow the caller received or floor payment is there the present value of the caller uh the floor as well as the cap if you see it should actually the payoff should be nil the payoff should be made nil because the payoff okay the premium you pay the initial date which means present value should be considered and the cash flow will happen. The okay the benefit derived from this option is the option two option taken together the benefit der from the option is over a period of time this benefit they want us to equate it to zero now what you need to do now really the 7.8 8.6 9.2 10.6 is there. This is expected rate. Agreed.
Cap rate is given. Which means you tell me children flow rate you need to find.
See as the what is that my caller? Zero cost required to flow rate. To make a zero cost you need to find out the flow rate. So cap rate see what is flow rate.
Now flow rate is the strike price of the flow rate. Strike price of the flow rate such that you will exercise. See here what is the rate of the cap? Cap rate given what is simply 9.5. Now what is the meaning here? Cap price. Now this is exercise price. The cap will be excised 9.5 which means at each reset you will compare this 9.5 with 7.8 9.5 with very simple cap when you will exercise when the okay the rate is more than the exercise price the first 3 years you will never exercise cap agreed just like in our question we did one question so you will never because see you have a right to buy cap option is what right to buy at 9.5 interest rate what is 7.8 Try to pay 9.5 will you pay 9.5 interest okay by receiving 7.5 interest are you understanding which means you will lapse it so this case laps laps laps okay laps last case you will exercise what is the differential amount 10.6% 6% - 9.5% 1.1% are you understanding this 1.11% yes happen here not principle given or not given a yes he's given 100 cr you can use the notional principle or you may not even use the later we can use the notional principle that is not an issue this 1.1% what you can do is that this is happening the gain is here now the cap benefit from the cap cap recept correct this you need to discount the fourth discounting rate are you all understanding which means you will find out this present value of the cap. Now flow uh rate is not given. Flow rate is not given. So what I will take is that I will consider such rate X I will consider as flow rate. Agreed. Now X how will you compare this which means X minus 7.8%. See there what happened? Cap minus this number. So what is that?
Um 7.8 See 7.8% you will compare 7.8 - 9.5%.
This you will do and you will okay anyway labs labs laps when you exercise it will be 10.6% minus the cap strike price 9.5%. Are you all understanding?
See the very simple cap I told you is like call option. Call option. What is the benefit from the call option? FSB minus strike price. Agreed? Now the floor option. What is the benefit benefit of the put option? X strike X minus FSP. Are you understanding? These are all the variable rate in terms of interest rate risk management chapter. I told you these are allar rates. The respective labar rates interest rate are all variable rates are all okay. What do you say this? These are all future spot prices like to be future spot price not strike price. The strike price is given 9.5 and this strike price of the floor is what is asked in the question. Let me assume this is x. So x - 7.5% like this you get in the first year discount using first year rate up x - 7.8% into.96.
Okay. Uh this is this plus what do you get? 8 x - 8.6%. into.92 like this you will find out all the total of it. equate it okay to this one are you are understanding you find out the x value okay this anyway this is how you should find out the u fair floating rate uh flow rate sorry flow rate now strip price of the flow this okay in regular lecture I discussed something called as swap valuation I discussed something called as swap valuation swap pricing there based on FRA method based on FRA valuation method I discuss it here also the concept of discounting okay will be there. So somewhat you can relate it okay swap now this is okay this is like swapions instruments where it is like swap and a combination of swap and options are you understanding anyway um you can try it if you have you know conceptual clarity over entire swap who does it anyway so this is really I will consider out ofbox question and honestly uh four marks tested anyway four marks I would be added okay separate list I have made I'll just discuss from that this question okay next question this question free cash flow valuation easily doable okay regular lecture fast track lecture every everywhere I've discussed there two stage free cash flow to equity model you can do that now this is doable only next question totally okay out ofbox questions any market related question where you can find out okay even if you find out uh in some other source now I will also happy to include in my material because this okay anyway is new to me even if you attend the regular lecture to be honest you will not be able to solve this question okay this question carries seven marks seven marks We did. Anyway, fourth question. They have damaged totally seven marks. Four marks. Again, part B also four. No, no, fifth question. Sorry, fifth question.
They have done it. Okay. Next, 5B. This is there. 5 C. 5 C is okay. Again, this is okay. Translation exposure versus transaction exposure. Okay. Available in forex theory. Uh if you had studied theory properly, you can do that.
Anyway, next sixth A is there. This is a complex question from mergers and acquisition. complex in the sense lot of reverse working involved conceptual clarity about the entire subject is involved I don't want to discuss deep into these things okay already we we are late so what I'm doing is that I will just okay categorize into out of box cate okay I'll just put it in out ofbox category because I don't want to be biased even though it is manageable if you attend the entire lecture series 200 hours if you have listened now you can attend this and you can get see how many marks is this seven marks push 10 marks seven marks out of seven marks four marks easily you score is what I believe okay and I don't know uh the real situation but I believe based on I know after seeing the question examining the question four marks is goable from this the market price synergy value and all the offers are given analyze the offer you can analyze the offer and for that step marking will be there you can get these marks from the this segment so that is one thing and uh yes this question but anyway I will consider the entire seven marks to be new Let's assume like this worst case scenario.
Let's assume like that text is part B.
Yes. 6B small black also discuss this is important for this. Hence uh anyway see black small then ask for ask 15 to 18 just like your what is that sharp single index model. Okay. The sharp optimum portfolio. Just like sharp optimum portfolio tested for prolong period. Okay. I used to conduct this in regular lecture. What is the use of it?
What is the Okay. I used to think what is the use of it anyway they not testing okay all these I normally think of but in the uh in this attempt they have asked black shoes last attemp they asked optimum portfolio this also they asked us so I believe okay I have reason to continue discussing in the regular lecture that is what I would say anyway in this question everything is same if you apply the formula out of the seven months tested for seven months two things I wanted to clarify see you have the hedge ratio this is a new terminology which they have put here this is not new But okay this kind of question generally they don't ask in the even in my regular lecture I don't okay name this as hedge ratio I discuss only I assign the probability to the spot I assign the probability to the exercise price I discuss okay overall uh in an overall manner I discuss but I don't discuss okay this deep and they have put it exactly the hedge ratio and the probability that the stock price over and above the exercise price what it means I'll tell you okay since they have asked it I'll tell you see what happens the formula ultimately you forget about the d1 d2 how to find out okay ln of s by x the the formula you know that that is not an issue the ultimate formula is spot into n d1 agreed okay minus strike price divided by e to ^ tr or nothing but present value of strike price into n d2 this is what is okay the black's formula are you understanding ultimate either d1 has a separate formula d2 has a separate formula how to find out d1 d2 is an issue that that's separate What they asking? What they saying? Very simply the N D1 is there now the N D1 which you multiply with the spot price.
This is called as hedge ratio. This is called as hedge ratio. See the third part is asking you value of call and put option. Okay. That is okay. I that the value of call and put option. Anyway you can substitute the formula. You will find out the value of call and put. They will award see minimum they will award you five marks out of seven. Why?
Because you ND1 is just a process. Now you will also find out the ND1 if you see the book. But the hedge ratio you may not be in a position to put hedge ratio is equal to n1 and this is the value. So I think okay the steps are same. I think five marks four or five marks will be award awarded to find out the value of column 4. But since they asked see this is the hedge ratio. This is nothing but hedge ratio. So n1 is the hedge ratio. Okay. How much of the equity share just like of delta it is nothing but delta which in the riskless hedge portfolio method. See I told you the blackolds model is nothing but an expansion of the binomial. Okay.
First initially binomial model only two came then the riskless hedge only came initially. Thereafter the risk neutral probability the risk neutral formula itself the formula is n e to the power t r minus d divided by u minus d upper f upper probability. This is actually derived from the if you see the hull there's a author hey a US hull derivative famous author you see their books uh they will show the derivative of these black sports model the riskless hedge port risk neutral model the risk neutral model actually derived from the riskless hedge portfolio and then the extension of it is black's model multi period okay infinite binomial model but black's model so the n1 is nothing but hedge ratio hedge ratio which I used in our um what is the delta hedge model the delta is there now that is what is nd1 given in the black shorts model. That is what they are testing as hedge ratio.
Next the probability the price in spot market on expiry would be higher than the exercise price. Now this is nothing but this one. Okay. X - e^ n2. Okay.
Here not not the x by e. Yeah. The n d2 alone. The n d2 alone is there. Now this I call it as okay. The probability of okay the the maturity spot price to be higher than the exercise price. See very simple. If the FSP is more than exercise price then only call will be in the money or exercisable okay it will be favorable these are all technical terms jargon don't think thing okay normally if you have to listen to my lectures this you'll be comfortable with these terminology I believe FSP is greater than XA on the maturity date if the Reliance limited share price is 4,000 and exercise price is 2,000 assume the Reliance share price is 4,000 the maturity will you exercise yes a share worth 4,000 available for exercise at 2,000 now you will exercise your right are you all understanding This is called as in the money situation which means you will be beneficial as a call holder if you exercise your right.
So anyway this is what is given. What is the probability for this? Now this is nothing but n2 d2 is called as probability when the call is in the money. When the call is in money when call will be in the money when the fs mean is greater than strike price.
Anyway this is for call not for put anyway that will change. Okay. H ratio also end will change. Okay this is for call not for put. N1 minus one it will be reverse. Okay. If you take the normal distribution table anyway these are all not required. This is what okay I would say this is the fire assessment all the questions individually I have discussed and give you an overview what of what what concepts they have tested and how should we approach okay if they test these concepts now I'll come to the approach later see I have summarized here if you want to take this see here I have prudently summarized I I've given here see what I have discussed here totally new plus very challenging this only I call it as out of box let's say this is out of box okay which means even if you attend the regular lecture you may not be in a position to comfortably solve this question. Still I believe strongly you can okay collect some marks here and there possible but let's assume you attended the regular lecture you attended it properly listened to it properly okay without skipping any topic and you have revised it thoroughly you have prepared well prepared for the examination now okay how many marks you know 26 marks is still out of box it will be there let's prudently assume because I have deducted from 2B two marks I have deducted and in the money out of the money there also I have deducted two marks like this I have deducted here and there here the question if you see this there's a fully okay Seven mark question equity uh the question this M&A question this is M&A question and uh this one seven marks if you see uh this is the total money market question one question there I have removed it four mark opt even though they have taken optional okay like this I can say that okay studently 26 marks are totally out of box are totally out of box it will require some level of knowledge almost and maybe AI to solve those questions without you know uh you know human brain cannot do that in given level of time for 3 hours should be no so 26 marks I can see now the question paper total how many marks so let's say 14 marks because one option questions is one choice is also there so totally 114 or 116 marks maybe okay minus if you do 26 14 here will be reduced balance 12 88 still eight mark eight more marks I okay even I'll prudently reduce it still 80 marks is easily doable 80 marks is easily doable fair as ment I'm doing okay just because that everyone is saying pepper is totally out of box okay full question pepper is entirely out of box no I will not say like that and this is to be very fair I strongly believe 80 marks is still doable for an average person who the the so you may ask me one question sir see you are as a faculty you are saying you can attend for 80 marks or not as a student okay whether can you guarantee that 80 marks I I can attend yes I have shown you the time value of Why do you think that I put time value of money in comprehensive division series of CA final? Tell me because the time value of money which you would have studied in foundation is different. What I want you to learn some basic things.
Okay. Present value, perpetual cash flow, annuality cash flow. These are also required because these may be tested in the know one big question they may give and one small adjustment they may give. Are you understanding can you see if you if you if you are attending income tax papers suppose you are attending and there is a section 1 see 143 proceeding. The question is mentioned okay under 1433 proceedings like this you did can you say that no no 143 what is 143 they have to elaborate 143 will they elaborate no so each and every subject you have to learn the technicality of each and every subject audit let's say I can I use my own language which they give marks have to use the fair and true view okay like this you have to true and fair view like this you have to use the technical terms whatever is there now so I strongly believe that you have to upgrade yourself if you feel this is totally difficult But whatever I discussed at least after discussing this okay you should have the confidence I request you not to panic okay still you can easily solve around 80 marks go okay and um how to go about the next I strongly believe you should be not not my lecture not necessarily my lecture I'm not okay you should take lecture from those faculty cover the syllabus and honestly say that this is okay these things I work these things I don't cover regular lecture few students have asked me for regular lectures you know I have honestly told you what are all the things out of this paper considering this is the toughest paper so I would say honestly from my lecture if you say 80 85 marks will be covered other than that okay will be obviously depend on your preparation your you know this 80 mark is also not guaranteed this 88 I should say actually and this 88 or 85 marks is also not guaranteed if you are not having the spark it may be there okay exam situation the summer is there okay you may not be able to recollect everything technical subject I can understand that okay that's why the inconsistency of IC is what is threatening problem creating a trouble for me I am not against asking difficult paper or tough paper the problem here is they are not doing it on consistent basis now if you don't do it on consistent basis right what happens for three or four year or for next seven or eight attempts if you put easy questions students will come to the okay mindset that okay this is what I need to do this is what I need to study I don't want to I don't need to do go learn deep concepts I just need to just listen to 60 70 hours of revision I can clear easily if this is the case fine but what happens if this kind of question comes then 6 months will be wasted okay hard preparation even if you do 100% of preparation you cannot crack this kind of question paper this what is the issue and also okay it depends on preparation it depends on person to person I have made the analysis I will leave it to you okay but I will say that you make an honest assessment of yourself. Okay. Whether you have heard the syllabus properly, see I I'll just okay on a finishing note I can just tell you one thing. See I will tell that there are two approaches for the examination. One is that pick and choose approach or uh full coverage approach full coverage. Now you may ask okay in my regular also these things are not yes obviously I tried my best okay still there are few areas which couldn't come up that will be there anyway we will bridge the gap that is there but this will happen even if you go and attend any faculty's lecture most of the faculties lecture you can just count okay all over India you can count of faculties in finger fingers will be hardly less than five or six faculties across who can give the coverage what I'm giving not not uh hosting myself or something I'm just humbly saying okay whatever I'm giving is is far more than what you get ordinary in the market.
Okay. But the point is I I'll just see from the students perspective you have two option full coverage or partial coverage. Partial coverage now whatever already given in the thing material and concept concept wise okay I'm not giving full coverage. Now you see I have two questions to answer whether okay I will clear CA when I will clear the CA. Two questions are there. Okay. If you give full coverage, I strongly believe the weather question will be taken up that will be sorted. Are you understanding only issue will be matter of time. The question of time now you don't know you may clear this you may not clear this up. If you attend properly lectures revised properly thoroughly prepared assume may 26 examination question came this paper came and you couldn't for some reason recollect everything fine.
one or two attempts fine but you will definitely clear because you have done the homework after understanding you have given the full coverage conceptually you'll be very strong okay that is there but if you don't cover the syllabus fully conceptually and fully the problem is that okay the weather will also be question mark okay when is there are you understanding so it will be a question of time it will be a question of possibility possibility okay question will be there if at all it is possible or not.
Okay, with this I'm concluding my um session. Okay, hope I have answered all your queries. Okay, for the past 2 days I'm getting so many queries. I was traveling I couldn't okay record the video but anyway those who are attending the group too all the best for them.
Thank you so much for listening to this long video lengthy video but I hope this clarified all your doubs. Thank you.
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