Question 5 (13 marks) Read the scenarios below and answer the questions that follow:
5.1 Company XYZ’s share is currently trading at R85. After analysing Company XYZ’s share, Investor AA purchases a R95 December call at a premium of R4 per share. One call option contract is made up of 100 shares. On the other hand, after analysing Company XYZ’s share, Investor BB purchases a R80 December put at a premium of R5.50 per share. One put option contract is made up of 100 shares. Note: show all calculations and round off your final answers to two decimal places.
5.1.1 What could be the reason for Investor AA purchasing the call option on Company XYZ’s share? (1)
5.1.2 What could be the reason for Investor BB purchasing the put option on Company XYZ’s share? (1)
5.1.3 Calculate the break-even price per share on the call option. (1)
5.1.4 Calculate the break-even price per share on the put option. (1)
5.1.5 Suppose at expiration, Company XYZ’s share is trading at R65. Determine the profit or loss on the call and put options. (4)
5.1.6 Suppose at expiration, Company XYZ’s share is trading at R105. Identify the investor who will exercise the option and not exercise the option. (1)
5.2 Hedge Fund A has R200 000 000 assets under management (AUM) at the beginning of 2020. The annual management fee is 1.5%, charged at the beginning of the year. The performance fee is 20% of the fund’s performance in excess of the hurdle rate. The hurdle rate is set at 7%. By the end of 2020, the hedge fund achieved a return of 18% after management fees. Note: show all calculations and round off your final answers to two decimal places.
5.2.1 Calculate the management fee for the hedge fund. (1)
5.2.2 Calculate the performance fee for the hedge fund. (1)
5.2.3 Suppose the high-water mark in 2020 is R229 304 000 and the hedge fund’s AUM at the end of 2021 is R230 000 000. What will be the high-water mark in 2021 and why will this be so? (1)
