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Financial Securities Valuation (BFBL506)
In Module Assessment
This coursework is due on WEDNESDAY, 9TH DECEMBER 2015 BEFORE 13:00 (1PM):
Note: Students are required to submit their Excel calculations online using the assessment tool
provided. Groups that do not submit their Excel file will be heavily penalised.
Instructions
Students are required to note the following:
1. Students will be working in groups of THREE students, with the composition of the group to
be emailed to the MODULE LEADER by NO LATER THAN MONDAY 8th OCTOBER 2012.
2. Students are expected to submit the group coursework contracts to the module leader or
their seminar tutor by NO LATER THAN 17:00 on MONDAY 8th OCTOBER 2012.
3. The coursework is expected to be 3,000 WORDS LONG ( 10%).
4. Students are expected to answer ALL parts of the assignment.
5. The assignment should be produced in Microsoft Word and Excel.
6. In terms of presentation:
(a) All work must be presented in the sequence and manner suggested below.
(b) Students should strive for a clear organised statement to the reader and the coursework
should be proof read several times, MARKS WILL BE DEDUCTED for poor spelling and if
there is a lack of clarity.
(c) The coursework should be written in Microsoft Word, typescript Times New Roman
12pt., one and half line spacing.
(d) The coursework is expected to have a COVER PAGE, with your names, student numbers,
and group number. AND a TABLE OF CONTENTS.
(e) All tables, graphs and appendices are to be CLEARLY LABELLED; MARKS WILL BE
DEDUCTED for poor labelling.
7. Students are required to correctly reference any material used in the preparation of the
coursework and include a list of references at the end of the coursework, MARKS WILL BE
DEDUCTED FOR INCORRECT REFERENCING.
(Note: A guide on referencing can be found on the university library website at
http://www.westminster.ac.uk/study/current‐students/support‐and‐facilities/library‐itservices/
referencing)
8. As in any assignment, it is important to start early, to this extent, it is important that you
start meeting and collecting your data AS SOON AS POSSIBLE.
9. Students will be required to submit the assignment online and are therefore required to
familiarise themselves with how to do this WELL AHEAD OF THE DEADLINE, excuses of “I did
not know how to submit” will not be accepted.
10. Any submission by email is NOT acceptable and will NOT be marked.
Should you have any queries regarding these instructions, please do not hesitate to contact the
module leader either by email or during office hours.
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Question 1 (30 marks)
Choose an equity exchange anywhere in the world (it is suggested that you choose one of the major
exchanges). Having done this, describe the history and characteristics of this exchange and then
critically analyse the valuation process for equities.
Suggested Structure:
1. Introduction and Background to Equity Markets:
Should give an introduction to equities (what they are, where they are traded etc.) and why
people invest in this particular type of security.
2. History, Description and Characteristics of the Exchange:
Should outline the main characteristics of the exchange (history, size of exchange,
characteristics of contracts, major indices)
3. Valuation Techniques:
Should give a detailed analysis of the valuation techniques for the different types of equities
and analyse the merits and disadvantages of the valuation techniques as well as describe
any alternative methods.
4. Conclusion:
Should a half page conclusion on what they have founds.
This section should comprise approximately 1,500 words.
Question 2 (40 marks)
Use Yahoo! Finance, or other sources, to obtain weekly CLOSING share prices for FIVE companies
on the FTSE 100 index as well as the FTSE 100 index values over a period of 5 years. Students must
not use the data set used in class (in the Excel file Seminar 7: Excel Data) – which in any event covers
only two years. STUDENTS ALSO SHOULD NOT USE THE COMPANIES FOR WHICH THESE DATA
WERE DERIVED, I.E. DATA FOR DIXONS, BOOTS GROUP, NEXT, GUS OR KINGFISHER.
Following this, students are required to:
1. Present the 5 x 5 covariance and correlation matrices of the stock price returns, and
comment on the characteristics of the correlation matrix.
2. Obtain the current market capitalisation for each company and, using this, determine the
number of outstanding shares.
(Note: The market capitalisation data should be available from Yahoo! Finance, from the
Financial Times website at www.ft.com/markets/equities or by consulting the Monday
Edition of the Financial Times.)
3. Present a table of the current market capitalisation, current share price and the calculated
number of outstanding shares for each of the companies selected.
4. Construct a cap weighted index, referring to this as Index A, comprised of the 5 companies,
assuming that the number of outstanding shares has not changed over the past 5 years.
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5. Derive the efficient portfolio (i.e. the market portfolio) from your 5 stocks, referring to this
as Index B, where:
(a) You should explain your methodology fully, illustrating your discussion with graphs as
appropriate.
(b) Provide interpretations of this portfolio, providing a table of the weights that are given
to each of the stocks in the portfolio.
6. Once again, ensure that all tables and figures are clearly labelled.
After they have completed the preceding calculations, students should provide a written description
that covers the following:
1. The concepts behind the calculations.
2. The statement and justification of any assumptions made.
3. The statement of the formulae used.
4. A BRIEF outline of the procedure used.
5. A discussion of the major points and drawbacks.
This section should comprise approximately 1,000 words.
Question 3 (15 marks)
The Greek sovereign debt crisis has highlighted the need for accurate fixed income valuation
techniques. Discuss this concept, highlighting the valuation techniques for fixed income securities.
Furthermore, students are expected to highlight the relationship between coupons on bonds and
the prevailing yields in the fixed income markets, and the means by which this can be controlled.
This section should comprise approximately 500 words.
Question 4 (15 marks)
Consider the purchase of a six‐month European call option on a non‐dividend paying stock, where
option has a strike price of £40. The stock is current trading at £40 per share, while the volatility of
the stock is 30% p.a. and the yield on government bonds of a similar maturity is 4% p.a.
Using the information given above, construct a two‐step binomial tree for the option and determine
the correct value of the option concerned. You should present the binomial tree and option value in
the word document, alongside any formulae and assumptions used in the valuation process.
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