Individual Coursework
INSTRUCTIONS TO CANDIDATES
• Please submit your assignment electronically through Canvas using the
“Assignments” tab.
• Please use your UB number as the submission title since the assignment requires an
individual submission.
• You can submit as many times as you like before the submission deadline. Your last
submission prior to the deadline will be your final submission and this is the one that
will be marked.
• Only a single Microsoft Word document is accepted for submission. The permissible
formats are limited to the following file extensions: .doc, .docx.
COURSEWORRK BRIEF
The individual coursework requires you to answer three questions. You should complete the
coursework independently. There is no (upper/lower) limit on the number of words for this
coursework.
Guidance on how to write mathematical equations in Microsoft Word is provided below:
Math equation
examples
Descriptions How to write in Microsoft Word
2 + 2 = 4 Two plus two equals four 2 + 2 = 4
2 – 2 = 4 Two minus two equals zero 2 – 2 = 0
2 × 2 = 4 Two times two equals four 2*2 = 4
2÷2 = 1
OR
2
2
= 1
Two divided by two equals one 2/2 = 1
2
2 = 4 Two to the power of two equals four 2^2 = 4
√4 = 2 Square root of four equals two sqrt(4) = 2
OR
4^(0.5) = 2
√(2 + 2)
2/4 = 2 sqrt((2+2)^2/4) = 2
?? beta_A
OR
b_A
Answer ALL the questions.
Details of calculations are required.
Question 1. Capital markets (30 marks in total)
Answer the following independent questions:
a) Historical nominal returns for Coca-Cola have been 8% and -20%. The nominal returns for the
market index S&P500 over the same periods were -15% and 28%. Calculate the beta for Coca-cola. (5
marks)
b) The covariance between stocks A and B is 0.0014, standard deviation of stock A is 0.032, and
standard deviation of stock B is 0.044. Which of the following is the most appropriate to depict the
risk-return characteristics of a portfolio consisting of only stocks A and B, and explain why? (5 marks)

(A) (B) (C)
c) Assume that using the Security Market Line (SML) the required rate of return (RA) on stock A is found
to be half of the required return (RB) on stock B. The risk-free rate (Rf) is one-fourth of the required
return on A. Return on market portfolio is denoted by RM. Find the ratio of beta of A (A) to beta of B
(B). (10 marks)
d) Assume that the short-term risk-free rate is 3%, the market index S&P500 is expected to pay
returns of 15% with the standard deviation equal to 20%. Asset A pays on average 5%, has standard
deviation equal to 20% and is NOT correlated with the S&P500. Asset B pays on average 8%, also has
standard deviation equal to 20% and has correlation of 0.5 with the S&P500. Determine whether
asset A and B are overvalued or undervalued, and explain why. (10 marks)
(Hint: Beta of asset i (??) =
?????
??
, where ??
,?? are standard deviations of asset i and market
portfolio, ??? is the correlation between asset i and the market portfolio)
Question 2. Foreign exchange markets (35 marks in total)
Statoil, the national company in Norway, is a large, sophisticated, and active participant in both the
currency and petrochemical markets. Although it is a Norwegian company, because it operates within
the global oil market, it considers the U.S. dollar ($), rather than the Norwegian krone (Nok), as its
functional currency. Ari Karlsen is a currency trading strategist for Statoil. Answer the following two
independent questions a) and b):
a) Statoil sold 1 million barrels of crude oil to the Norwegian petrol station chain, Circle K, today
for 120 Nok per barrel (Nok denotes the Norwegian Krone). Statoil expects to receive the full
payments from Circle K in 3 months’ time when the crude oil is delivered to Circle K’s facilities
in Norway. Statoil is informed that Circle K will pay for the oil in Norwegian Krone. Ari is asked
by the Chief Financial Officer (CFO) about the strategy to reduce the uncertainty around the
expected payment from Circle K. Ari is faced with the following market rates:
Spot exchange Rate Nok 6.0312/$
3-month forward rate Nok 6.0186/$
U.S. dollar 3-month interest rate 5%
Norwegian Krone 3-month interest rate 4.45%
Based on the above information, what hedging strategy should Ari advise the CFO that works the best
for Statoil? Explain why Ari should choose such hedging strategy. How much U.S. dollar will Statoil
receive at the end of 3 months by using this hedging strategy? (20 marks)
b) In a daily meeting, the Chief Financial Officer (CFO) gave Ari the following table of market rates
Spot exchange rate: Yen 106/$
U.S. dollar interest rate per annum 10%
Japanese Yen interest rate per annum 6%
and told Ari that the company’s financial analyst expected the Japanese Yen to depreciate against the
U.S. dollar by 3.46% in 90 days. Assume there are 360 days in a year, and all interest rates are simple
interest rates. If the financial analyst’s prediction about the US dollar and Japanese Yen turned out to
be true:
b.1) What would the spot exchange rate (Yen/$) be in 90 days? (5 marks)
b.2) Would Ari make a profit by borrowing 1 million US dollar and investing in the money markets?
If yes, how much profit would Ari realize in 90 days?
If no, explain why. (10 marks)