CA Final January 2026 Suggested Answers Paper 2 Advanced Financial Management

FOR CA FINAL EXAM PREPARATION

CA Final 2026
Suggested Answers ·
Paper 2 Advanced
Financial Management
EXAM YEAR TYPE

CA Final 2026 Suggested Answers
SUBJECT DATE

Paper 2 Advanced Financial Management January 2026

Notes · Sample Papers · Previous Year Papers · Mock Tests

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PAPER – 2: ADVANCED FINANCIAL
MANAGEMENT
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Part I – Multiple Choice Questions

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Case Scenario -1

g Bank Ltd. need funds for a period of 7 days. To meet this financial need, ona
aShort
20 September, 2025, Short Bank Ltd. entered into an agreement with Long Bank
th

Ltd. under which, Short Bank Ltd. will sell 8% GOI Bonds @6% p.a. for ` 5 crores
(Face Value) with initial margin 2%. Each Bond Face Value is ` 1,00,000.
The maturity of this 8% GOI Bond is 31st December, 2029, originally issued on
1st January, 2025. Interest payable annually. The clean price of the bond is
` 99,420.
Note: Assume 360 days in a year.
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From the information given above, choose the correct answer to the Question No.
1 to 3:
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1.
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The arrangement entered by Long Bank Ltd. is ______and that by Short Bank
Ltd. is _____. a
(A) Repo, Reverse Repo
(B) Lending, Repo
(C) Reverse Repo, Borrowing
(D) Reverse Repo, Repo (2 Marks)
2. Accrued Interest and dirty price of the bond as on 20th September, 2025 will
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approximately be ` ______and ` ______respectively.
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c. o (A) ` 5,822 and ` 1,05,242

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s em (B) ` 5,788 and ` 93,632
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gla (C) ` 7,954 and ` 1,07,374
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a (D) ` 7,954 and ` 91,466 (2 Marks)

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FINAL EXAMINATION: JANUARY 2026

3. The proceeds of the 1st Leg of the transaction shall be approximately `_______
and the 2nd Leg proceeds of the transaction shall be ` __________.
(A) ` 5,15,52,000 and ` 5,16,12,150
(B) ` 5,15,68,580 and ` 5,16,28,743
(C) ` 5,15,52,000 and ` 5,61,12,150
(D) ` 5,51,52,000 and ` 5,61,12,150 (2 Marks)
Case Scenario - II
The Inter Banking Rates on 28th June, 2025 were as follows:
Spot US$1 = ` 86.50/55
1 Month forward premium 5/8
On 1st May, 2025, Mr. M an exporter enters into a forward contract with
DMP Bank to sell US $ 2,50,000 on 31st July, 2025 at the rate US $1 = 86.80.
However, Mr. M received the amount on 28th June, 2025.
Mr. M requested the bank to take the delivery of the remittance on 30th June, 2025
i.e. before due date.
Note 1. Consider 365 days in a year.
Note 2. Prevelling Prime Lending Rate is 15% p.a.
From the information given above, choose the correct answer to the Question No.
4 to 6:
4. Swap loss is __________.
(A) ` 12,500
(B) ` 32,500
(C) ` 45,000
(D) ` 25,000 (2 Marks)
5. Interest on outlay of funds shall be approximately ___________.
(A) ` 955 payable by Mr. M
(B) ` 414 payable by Mr. M
(C) ` 955 payable by DMP Bank
(D) ` 414 payable by DMP Bank (2 Marks)
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6. What is the net conversion rate per US $ realised by Mr. M?
(A) ` 86.6738
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(B) ` 86.3662
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(C) ` 86.3738
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(D) `m a
s e 86.6662 (2 Marks)
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g laScenario -III
Case a
aYou are submitted the following information in respect of Mr. Z's portfolio:
Share /Bond Cost Dividend/Interest Market Price Beta
(` ) (` ) (` )
A Ltd. 40,000 4,000 41,000 0.60
B Ltd. 50,000 5,000 52,500 0.80
C Ltd. 80,000 3,000 1,10,000 0.60

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GOI Bonds 1,70,000 17,000 1,61,500 0.01

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Average Return of the portfolio is 15.70% per annum.

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Note: Calculate upto two decimal points.

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From the information given above,
Question No. 7 to 9:
7. Expected return on market portfolio (Rm) is -
(A) 14.38%
(B) 15.34%
(C) 15.88%

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(D) 16.32% (2 Marks)

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8. Risk-free rate of return (as per simple average) is -

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(A) 15.42%
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las (B) 15.52%
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ag (C) 15.62%
(D) 15.72% (2 Marks)

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FINAL EXAMINATION: JANUARY 2026

9. Expected rate of return on shares of C Ltd. is -
(A) 12.38%
(B) 13.54%
(C) 14.12%
(D) 15.74% (2 Marks)
Case Scenario - IV
Ujwal Bank Ltd. (UBL) and Suraksha Bank Ltd. (SBL) are Scheduled Banks to
merge.
UBL is strong Private Sector Bank with stable capital adequacy, while SBL has
negative CRAR due to heavy NPAs.
Data of both the Banks is as follows:

Particulars UBL SBL
Book Value per share (`) 50 25
Market Price per share (`) 200 50
CRAR% 12 (-) 2
NPA% 2 12
No. of shares in thousands 50000 20000
Price Earning Ratio (PE Ratio) 20 10
Weights for swap ratio are Book Value per share 20%, Market Price per share
40%, CRAR (%) 20% and balance for NPA%.
From the information given above, choose the correct answer to the Question No.
10 to 12:
10. The swap ratio based on information given shall be for 1 share of UBL
_________shares of SBL.
(A) 1.07
(B) 0.20
(C) 0.86
(D) 1.73 (2 Marks)

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11. Based on swap ratio total number of shares issued by UBL to SBL shall
be_________ (in Thousands).

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(A) 21,400 shares

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(B) 24,000 shares

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(C) 17,200
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shares
(2 Marks) gl
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(D) 4,000 shares
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12. Post merger Earning Per Share (EPS) of UBL shall be ` __________.
(A) ` 11.11
(B) ` 12.50
(C) ` 8.50
(D) ` 10.00 (2 Marks)
Scenario - V
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PQR Ltd. is considering two new products A and B, only one of which can be added

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to its production line. Product A is sure seller. It is certain that 2,00,000 units of

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product A with the firm's maximum capacity can be manufactured and sold each
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year with a contribution margin of 5 per unit.
Product B with a contribution margin of ` 10 per unit is potentially more profitable.
However, there is uncertainty about its marketability and following sales forecast
has been prepared:

Sales units of B (per annum) Probability
50,000 0.25
1,00,000 0.50

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1,50,000 0.25
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From the information given above, choose the correct answer s
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to the following

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Question No. 13 to 15:
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ag 13. If Company select product A, the profit of the company is -
(A) ` 2,00,000
(B) ` 4,00,000

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FINAL EXAMINATION: JANUARY 2026

(C) ` 6,00,000
(D) ` 10,00,000 (2 Marks)
14. If company select product B and sale 1,40,000 units, the profit of the company is-
(A) ` 4,00,000
(B) ` 8,00,000
(C) ` 10,00,000
(D) ` 12,00,000 (2 Marks)
15. If company select product B, the expected value of profit of the company is -
(A) ` 2,00,000
(B) ` 4,00,000
(C) ` 8,00,000
(D) ` 10,00,000 (2 Marks)
ANSWER TO PART – I CASE SCENARIO BASED MCQS

MCQ No. Correct Option
1. (D)
2. (A)
3. (B)
4. (B)
5. (A)
6. (D)
7. (C)
8. (B)
9. (D)
10. (B)
11. (D)
12. (A)
13. (B)
14. (B)
15. (B)

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Part II – Descriptive Questions
Question No.1 is compulsory.
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Candidates are also required to answer any four from the remaining five

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questions.

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a(a)g M/s. Wealth Builders, an Asset Management Company (AMC), launched a
Question 1

dividend bonus scheme on 1st April 2019. The fund demonstrated strong
performance over the years.
Key events are as follows:
• On 30th September 2021, the fund declared a bonus of 1:4 (one bonus
unit for every four existing units held).

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• On 30th September 2023, a second bonus of 2: 5 (two bonus units for
every five existing units held) was declared.

s emthroughout.
Ms. Investor made a lump-sum investment of ` 25 lakhs in the scheme at its

investment has generated g l a
inception and remained invested As of 31 March 2025, her st

a an average annual yield of 16.8%.
The Net Asset Value (NAV) of the scheme on various dates is provided below:

Particulars 30.09.2021 30.09.2023 31.03.2025
NAV (in `) 78 88 110
Required:
Determine the opening NAV per unit as on 1st April 2019 for Ms. Investor's
holding.
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(6 Marks)

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c. o (b) T Ltd., a listed company on stock exchange, currently hass84% m
("Round off all intermediate and final calculations to two decimal places.")

m e promoter
s e a Free Float
holding i.e. 126 Lakh shares. Profit after Tax is ` 9.60lCrores.
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gla market capitalization is ` 38.40 Crores. As per SEBIaguidelines promoters
a have to restrict their holding to 75% to avoid delisting from the stock
exchange. Board of Directors has decided not to delist the share but to comply
with the SEBI guidelines by issuing bonus shares to minority shareholders

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FINAL EXAMINATION: JANUARY 2026

while maintaining the same P/E Ratio.
You are required to calculate:
(i) P/E Ratio
(ii) Bonus Ratio
(iii) Market price of share after Bonus issue
(iv) Post bonus Free Float Market Capitalization. (4 Marks)
(c) Ms. Priya initiated the following option strategy on Omega Industries
Limited's equity shares:
Transactions executed:
(1) Bought one European Call Option with the following terms:
• Premium paid : ` 42 per share
• Strike Price : ` 620
• Maturity : 3 months
(2) Bought one European Put Option with the following terms:
• Premium paid : ` 8 per share
• Strike Price : ` 480
• Maturity : 3 months
Additional Information:
• Current Market Price (CMP) of Omega Industries: ` 550 per share
• Lot size: 150 shares per contract
• Ms. Priya holds the positions until expiration
Required:
(i) Calculate the net profit/loss in the following scenarios at expiration
• Share price remains unchanged at ` 550
• Share price declines to ` 380
• Share price appreciates to ` 680

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(ii) Determine the upper and lower breakeven points for this strategy.
(4 Marks)
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(Note: Round off all intermediate and final calculations to four decimal

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places.)

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Answer
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(a)
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a (a) Average Yield 0.168
(b) Investment ` 25,00,000
(c) Gain over a period of 6 years (a*b*6) ` 25,20,000
(d) Market Value as on 31.03.2025 (b + c) ` 50,20,000
(e) NAV as on 31.03.2023 110
(f) Total units as on 31.03.2025 (d/e) 45636.36
(g) No of units as on
o
31.03.2023
m Pre bonus
= 45636.36*5/ (5 + 2)
. c 32597.40
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(h) No of units as on e31.09.2019
= 32597.40*4/ (4 + 1) as
Pre bonus

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26077.92

Issue Price as on 01.04.2019
Investment ` 25,00,000/ Units purchased 26077.92 (b/h) = ` 95.87
Alternatively, it can also be computed as follows:
Units on 01.04.2019 X
Units after bonus on 30.09.2021 (1:4) 1.25X

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Units after bonus on 30.09.2023 (2:5) 1.75X

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Average yield 0.168
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Investment
se` 25,00,000
la ` 25,20,000
las Gain for 5 years (25,00,000 x 0.168 x 6)
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a ` 50,20,000
ag Total Value (` 25,00,000 + ` 25,20,000)
Where, 1.75X x ` 110 = ` 50,20,000
Therefore, X = 26077.92 units

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FINAL EXAMINATION: JANUARY 2026

Issue Price on 01.04.2019:
= ` 25,00,000 / 26077.92 units = ` 95.87
Alternatively, it can also be computed as follows:
Average Yield = 16.80%
Investment = ` 25,00,000
Gain over a period of 6 years = ` 25,00,000*0.168*6 = ` 25,20,000
Thus, Maturity Value on 31.03.25 shall be ` 50,20,000
50,20,000
No. of units = = 45,636.36
110
Now let B be the NAV on 01.04.19 then
25,00,000
Units acquired on 01.04.19 =
B
25,00,000 1 6,25,000
Units added on 30.09.21 = × =
B 4 B

31,25,000 2 12,50,000
Units added on 31.12.23 = × =
B 5 B
Thus, total units can be shown as follows:
2500000 625000 1250000
� + + �= 45,636.36
B B B
B = ` 95.87
Thus, the issue Price of units under Bonus Plan shall be ` 95.87.
(b) (i) P/E Ratio:
% of holding No. of Shares
Promoter’s Holding 84% 126 Lakh
Minority Holding 16% 24 Lakh
Total Shares 100% 150 Lakh

Free Float Market Capitalization = ` 38.40 crores
` 38.40 crores
Hence Market price = ` 160 per share
24.00 Lakh

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EPS (PAT/No. of Shares) (` 9.60 crores /150 Lakh) = ` 6.40 per share
P/E Ratio (`160/ `6.40) = 25
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(ii) No. of Bonus Shares to be issued:
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Promoters holding 84%, = 126 Lakh shares
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m remains the same, but holding % to be taken as 75% a
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Shares

g la Hence Total shares = 75%
126 Lakh

a
= 168 Lakh

Shares of Minority = 168 Lakh – 126 Lakh = 42 Lakh
Bonus 18 Lakh for 24 Lakh / 3 bonus for 4 held / 0.75 shares for 1 share
(iii) Market price before & after Bonus:
Before Bonus = `160 per share
After Bonus
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` 9.60 crores
New EPS
. = ` 5.71

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168 Lakh

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New Market Price (25 x ` 5.71) = ` 142.75

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(iv) Free Float Capitalization
` 142.75 x 42 lacs = ` 59.9550 crores
(c) Total Premium Paid (` 42 + ` 8) x 150 = ` 7,500
(i) Net Profit/ Loss under different scenarios:
• Share price remains unchanged at ` 550
 None of the options will be exercised and whatever premium

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paid i.e. ` 7,500 will be net loss.

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Share price declines to ` 380
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•
 Call Option is Lapsed and Put Option is exercised.eThe
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will be as follows:

gla Gain on Per Put Option (` 480 - ` 380) a
a
` 100
Lot Size 150
Total Gain ` 15,000

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FINAL EXAMINATION: JANUARY 2026

Less: Premium Paid ` 7,500
Net Profit ` 7,500
• Share price appreciates to ` 680
 Put Option is Lapsed and Call Option is exercised. The Net Profit
will be as follows:
Gain on Per Call Option (` 680 - ` 620) ` 60
Lot Size 150
Total Gain ` 9,000
Less: Premium Paid ` 7,500
Net Profit ` 1,500
(ii) Break-even Points
Upper: ` 620 + ` 50 = ` 670
Lower: ` 480 - ` 50 = ` 430
Question 2
(a) XYZ Ltd. has imported goods to the extent of US$ 8 Million. The payment
terms are as under:
(1) 1% discount if full amount is paid immediately, or
(2) 60 days interest free credit. However, in case of a further delay up to 30
days, interest at the rate of 8% p.a. will be charged for additional days
after 60 days. XYZ Ltd. has ` 25 Lakh available and for remaining it has
an offer from bank for a loan upto 90 days @ 9.0% p.a.
The quotes for foreign exchange are as follows:
Spot Rate INR/ USS (buying) ` 66.98
60 days Forward Rate INR/ US$ (buying) ` 67.16
90 days Forward Rate INR/ US$ (buying) ` 68.03
Advise which one of the following options would be better for XYZ Ltd.:
(i) Pay immediately after utilizing cash available and for balance
amount take 90 days loan from bank.
(ii) Pay the supplier on 60th day and avail bank's loan (after utilizing
cash) for 30 days.

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(iii) Avail supplier's offer of 90 days credit and utilize cash available.
Further presume that the cash available with XYZ Ltd. will fetch a return
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of 4% p.a. in India till it is utilized.

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Note:
• .Assume year has 360 days. s e
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se• Ignore Taxation.
la • Cashflows ` in Crore. ag
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• Round off all intermediate and final calculations to four decimal
places. (6 Marks)
(b) MNC Limited company's financial statements for FY 2024-25 are provided:

Income Statement (` in Cr.)
Sales revenues 7500
Costs and expenses
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o 200
7300
Income before taxes
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Taxes (30%)
s em 60
Net income
g l a 140

a
MNC Limited's Balance Sheet as at 31st March, 2025

Liabilities (` in Cr.) Assets (` in Cr.)
Equity 2000 Net Fixed Assets 4000
Long term Debt 2500 Current Assets 2000
Current Liabilities 1500
6000 6000
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m Additional Information:
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c. o (i) The company expects a 40% sales growth next financial year.
s em
s em (ii) The company will have a 25% dividend payout ratio lnext
g a year.
gla a expected to increase
a
(iii) All costs, current assets and current liabilities are
with sales.
(iv) Except retained earnings no new Equity is to be raised.

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FINAL EXAMINATION: JANUARY 2026

Required:
Compute External Funding Requirement through raising Long-term Debt:
(1) If the company is operating at 65% capacity usage for fixed assets.
(2) If the company is operating at 95% capacity usage for fixed assets.
(4 Marks)
(c) Differentiate how real options are different from financial options on the
basis of following four points:
(i) Underlying Asset
(ii) Pay-off
(iii) Exercise period
(iv) Approach (4 Marks)
Answer
(a) (i) Pay immediately to avail the discount

Spot Rate ` 66.98
Payment Due USD 79,20,000
(` Crore)
Outflow in Rupees (USD 79,20,000 × ` 66.98) 53.0482
Less: Cash Available (a) 0.2500
Balance amount to be borrowed from bank 52.7982
Add: Interest on loan for 90 days@9% p.a. 1.1880
Add: Opportunity Cost of Surplus Cash 0.0025
(b) 53.9887
Total Outflow in ` Crore (a+b) 54.2387

OR
If Opportunity Cost of Surplus Cash is not considered then, the Total
Outflow will be 54.2387 – 0.0025 = ` 54.2362 Crore

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(ii) Pay the supplier in 60 days

If the payment is made to supplier in 60 days the ` 67.16
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applicable forward rate for 1 USD
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Payment Due USD 8,000,000

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s e Outflow in Rupees (USD 8000000 × ` 67.16)
(` Crore)

gl a
g a
l Less: Cash Available (a)
53.7280
a
a Interest on the same for 60 days @4% p.a.
0.2500
0.0017
Balance amount to be borrowed from bank 53.4763
Add: Interest on loan for 30 days @9% p.a. 0.4011
Loan Outflow in ` Crore (b) 53.8774
Total Outflow in ` Crore (a) + (b) 54.1274

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(iii) Availing supplier’s offer of 90 days credit

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Amount Payable
m USD 8,000,000
e for 30 days@8% p.a. USD 53,333
a s
gl
Add: Interest on credit period

a
Total Outflow in USD
Applicable forward rate for 1 USD
USD 8,053,333
` 68.03
Outflow in ` Crore (USD 8,053,333 ×` 68.03) 54.7868
Less: Interest Earned on Cash for 90 Days @ 4% in 0.0025
` Crore
Total Outflow in ` Crore 54.7843

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Alternative (ii) is better as it entails lower cash outflow.

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(b) (i) External Funding Requirement in case of 65% capacity utilization
With only 65% Utilization, growth by 40% can be achievedm
e without any
corresponding increase in Fixed Assets (65*1.4 times =s91%)
s em g la
gla External Funding Requirement through LongaTerm (` in Crore)
a Debt
Expected Sales Revenue (7500 x 1.4) 10500
Costs and Expenses (7300 x 1.4) 10220

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FINAL EXAMINATION: JANUARY 2026

Income before taxes 280
Taxes (30%) 84
Net Income 196
Dividend Payout@25% of ` 196 49
Retained Earnings/ Internal Sources of Funds 147
Additional Funds Required (2000 – 1500)*0.4 200
Balance to be met from Long Term Debt 53

(ii) External Funding Requirement in case of 95% capacity utilization
With only 95% Utilization, growth by 40% can be achieved by
corresponding increase in Fixed Assets of ` 1320 Crore (95%*1.4 times
= 1.33 times of existing Fixed Assets of ` 4000 Crore). Projected Fixed
Assets increase to ` 5320 Crore.
External Funding Requirement through Long Term (` in Crore)
Debt
Expected Sales Revenue (7500 x 1.4) 10500
Costs and Expenses (7300 x 1.4) 10220
Income before taxes 280
Taxes (30%) 84
Net Income 196
Dividend Payout@25% of ` 196 49
Retained Earnings/ Internal Sources of Funds 147
Additional Funds Required (8120 – 2100 – 2000 – 2500) 1520
Balance to be met from Long Term Debt 1373

Alternative Solution
(i) Computation of EFR if company is operating at 65% capacity usage of
Fixed Assets.
Actual Sales
Full Capacity Sales =
% of capacity at which fixed assets were operated

` 7500crore
=
0.65

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= ` 11538.4615 Crore
` 4000 Crore
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Actual Fixed Asset Ratio should be = = 0.3467

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`11538.4615 Crore
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Revised Fixed Assets = ` 10,500 x 0.3467 = ` 3640.35 crore
s em
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Proforma Income Statement

g l a ` in Crore ag
a Sales Revenue 10,500
Less: Cost and Expenses 10,220
Income Before Tax 280
Tax @ 30% 84
Profit after Tax 196
Less: Dividend Paid 49

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Retained Earning 147

m . Sheet
e` in Crore
Proforma Balance

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ag 2000.00 Fixed Assets
` in Crore
Equity 3640.35
Retained Earnings 147.00 Current Assets 2800.00
Long Term Debt 2193.35
(Bal. Figure)
Current Liabilities 2100.00
6440.35 6440.35

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EFR = ` 2193.35 Crore - ` 2500 Crore = - ` 306.65 Crore
.c
c. o Alternatively, it can also be computed using the Formulam
s e as follows:

s em F
g la(1 – d)
la
  CA CL 
=  0 ×Revised Sales - F0 +
a
- ×ΔS - Net Profit
g
S   S S 
a
 0 
 2000 1500 
= (3640.35 – 4000) +  - ×3000 - (196 - 49)
 7500 7500 

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FINAL EXAMINATION: JANUARY 2026

= - 359.65 + 200 – 147 = - ` 306.65 Crore
(ii) Computation of EFR if company is operating at 95% capacity usage of
Fixed Assets.
Actual Sales
Full Capacity Sales =
% of capacity at which fixed assets were operated

` 7500crore
= = ` 7894.7368 Crore
0.95
` 4000Crore
Actual Fixed Asset Ratio should be = = 0.5067
` 7894.7368Crore
Revised Fixed Assets = ` 10,500 x 0.5067 = ` 5320.35 crore
Proforma Income Statement

` in Crore
Sales Revenue 10,500
Less: Cost and Expenses 10,220
Income Before Tax 280
Tax @ 30% 84
Profit after Tax 196
Less: Dividend Paid 49
Retained Earning 147
Proforma Balance Sheet
` in Crore ` in Crore
Equity 2000.00 Fixed Assets 5320.35
Retained Earnings 147.00 Current Assets 2800.00
Long Term Debt 3873.35
(Bal. Figure)
Current Liabilities 2100.00
8120.35 8120.35

EFR = ` 3873.35 Crore - ` 2500 Crore = ` 1373.35 Crore
Alternatively, it can also be computed using the Formula as follows:
F   CA CL 
=  0 ×Revised Sales - F0 + - ×ΔS - Net Profit (1 – d)
 S0   S S 
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 2000 1500 
= (5320.35 – 4000) +  - ×3000 - (196 - 49)
 7500 7500 

m
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= 1320.35 + 200 – 147 = ` 1373.35 Core
m
(c)
c. o s em
s em l a
ag
Basis Financial Options Real Options

g laUnderlying Have underlying assets Have underlying the
a that are normally traded in projects that are not
the market i.e. shares, traded in the market.
stocks, bonds, commodity
etc.
Pay-off In most of the cases it is It is estimated from the
specified in the contracts project cash flows and
and hence is fixed. hence can be varied.

m
co
Exercise Period Mostly the period of these The period of these
.
options is short and can options mostly starts

s em
go maximum upto 1 year. from the end of 1st year

g l a and higher than the

Approach
a Financial Options.
Since these options are Since these options are
normally traded in the used to make decisions,
market they are “Priced”. they are “Valued”.

Question 3
(a) A speculator purchases BFL Ltd. May Futures (lot of 125 shares) at 7750 and
chooses to Write BFL 7790 May call option with a premium of ` 30 (lot of 125
m
co
shares). As on May 18, spot prices rise and so the futures price and call
m .
c. o
premium. Futures price rise to 7780. Call premium also rises to ` 36.
m
se
Brokerage for the transaction is 0.02% for the transaction value of futures

s em and strike price net of call premium for options.
g la
gla You are required to calculate: a
a (i) Profit/Loss on Futures net of transaction costs.
(ii) Profit/Loss on options net of transaction costs.

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FINAL EXAMINATION: JANUARY 2026

(iii) Overall profit from both the positions net of costs.
(iv) Total Brokerage cost. (6 Marks)
(b) Following are the direct quotes available in the international market:
GBP1 = EURO 1.2950/65 (Direct rate)
GBP1 = USD 1.6025/6000
EURO1 = USD 1.2375/9000
You are required to:
(i) Calculate Bid & Ask Cross Rates for Euro per Pound (Euro/Pound)
(ii) Prove that arbitrage gains are not possible if-
(a) You buy Pounds against Euro under direct route and sell through
cross rate route.
(b) You sell Pounds against Euro under direct route and buy through
cross rate route. (4 Marks)
(c) A large Indian multinational corporation, "Global Ventures Ltd.", is planning
to set up a manufacturing plant in a developing foreign country. As part of
its due diligence, the board is concerned about the potential impact of
Political Risk on its investment.
In the context of international operations, you are required to:
(i) Identify four specific actions by a host country's government that can
signal the presence of Political Risk.
(ii) Recommend practical techniques to mitigate political risk exposure in
foreign operations. (4 Marks)
Answer
(a) Working Notes:
(1) Brokerage Payable on Initial Position

On Futures (7750 x 125 x 0.02%) ` 193.75
On Options (` 7790 – ` 30) x 0.02% x 125 ` 194.00
Total ` 387.75

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(2) Brokerage Payable on Closing Position

On Futures (7780 x 125 x 0.02%) ` 194.50
m
c. o
On Options (` 7790 – ` 36) x 0.02% x 125 ` 193.85

o m m
c
(i) .Profit/ Loss on Futures
Total ` 388.35

m s e
se Selling Futures
(`)
l a
g la 7,780
ag
a Buying Futures 7,750
Profit per share 30
Total Profit 125 x ` 30 3,750.00
Less: Brokerage on Initial Position 193.75
Brokerage on Closing Position 194.50
Net Profit 3,361.75

o m
c
Loss on writing Call Option.(` 36 - ` 30)
(ii) Profit/ Loss on Options (`)

emx ` 6)
6
s
laon Initial Position
Loss on Call Option (125 750.00

a g
Add: Brokerage Paid 194.00
Brokerage on Closing Position 193.85
Net Loss 1,137.85
(iii) Overall profit: (`)
Profit/ Loss on Futures (Net Profit) 3,361.75
Less: Profit/Loss on Options (Net Loss) 1,137.85

m
c. o(`)
Overall Profit 2,223.90

m
c. o m
se 387.75
(iv) Total Broking Cost

em la
On Initial Position

las On Options
a g 388.35

ag Total 776.10

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FINAL EXAMINATION: JANUARY 2026

(b) (i) Ask Cross Rate for Euro Per Pound
USD / GBPAsk 1.6025
= =
USD / EuroBid 1.2375

= Euro 1.2950/ GBP
Bid Cross Rate for Euro Per Pound
USD / GBPBid 1.6000
= =
USD / EuroAsk 1.9000

= Euro 0.8421/ GBP
Final Quote: GBP 1 = EUR 0.8421 / 1.2950
(ii) Calculation of Arbitrage Gain/ Loss
(1)

Buying Pound against Euro under direct route Euro 1.2965
Selling Pound against Euro through Cross Route Euro 0.8421
Loss per Pound Euro 0.4544
(2)
Buying Pound against Euro through Cross Route Euro 1.2950
Selling Pound against Euro under direct route Euro 1.2950
Loss per Pound Nil

Arbitrage is not possible – Proof
(1) If you want to buy Pounds against Euro, under the direct route,
you can acquire Pound at the quoting bank’s selling rate of
Euro 1.2965/Pound. If you sell Pounds under cross rate route, you
can sell Pound at the Cross-rate Bid price calculated in (i) above
i.e. 08421/ Pound resulting in a loss of 0.4544 Euros. Hence
arbitrage is not possible.
(2) If you want to sell Pounds against Euro, under the direct route, you
can sell Pounds at the quoting bank’s buying rate of Euro 1.2950/
Pound. If you buy Pounds under cross rate route, you can get
Pounds at the Cross rate Ask price calculated in (i) above i.e.

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1.2950/ Pound resulting in no profit no loss hence arbitrage is not
possible.

m
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(c) (i) From the following actions by the Governments of the host country

m
co
this risk can be identified:

. em
m
1. Insistence on resident investors or labour.
e2. Restriction on conversion of currency. l a s
a s
l 3. Expropriation of foreign assets by the local govt. ag
g
a 4. Price fixation of the products.
(ii) Following techniques can be used to mitigate this risk.
(1) Local sourcing of raw materials and labour.
(2) Entering into joint ventures
(3) Local financing
(4) Prior negotiations
m
Question 4
. co
s em
a
(a)

g l
a
Name Status Principal Duration Interest Strike Premium If PLR
Amount of loan/ rates of Rate (%) rate at
(` in deposit Borrowing/ (PLR) (lumpsum) the end
millions) (time) Lending (K) (P) of first
6-months
(Reset
Period)
AB Ltd. Borrower ` 5.00 5 Year PLR+0.5 8% 0.4% 10% p.a.
p.a.
m
m .co
XY Ltd. Depositor ` 2.00 3 Year PLR-0.5 8% 0.5% 6% p.a.

c. o m
p.a.

em
You are required to:
la se
las (i) Elaborate the strategy to be adopted by both the companies to hedge
a g
ag against the risk of interest rate fluctuations.
(ii) Premium paid/received based on the strategy to be adopted in (i) using
8% p.a. as the reference rate.

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FINAL EXAMINATION: JANUARY 2026

(iii) Net Gain/loss due to hedging to both the companies. (6 Marks)
(b) CE Ltd. has earned a net profit of ` 84 lakhs after tax at 30%. CE Ltd. has
developed a high tech product which is in high demand. The product has
been patented and has a market value of ` 100 Lakhs, which is not recorded
in the books. The Net Worth of CE Ltd. is ` 200 Lakhs. Long Term Debt is
` 400 Lakhs. The rate on 365 days Government bond is 10% p.a. Market
portfolio generates a return of 14% p.a. The stock of the company moves in
tandem with the market.
Required:
(i) Compute the operating income
(ii) Compute EVA
(iii) CE Ltd. has 7 lakh equity shares outstanding. Based on the EVA computed
in (ii), how much dividend per share can CE Ltd. pay before the value of
the company starts to decline? (4 Marks)
(c) A technical analyst at a portfolio management firm is tracking the stock price
movements of five different companies. The analyst has described the
observed chart patterns as follows:
• Scenario 1: The stock of "Dynamic IT Ltd." shows a series of uniformly
rising peaks and troughs, indicating a consistent upward price
movement.
• Scenario 2: "Momentum Motors Ltd." experienced a strong upward price
trend. This was followed by a brief period of consolidation, after which
the original upward trend resumed with significant volume.
• Scenario 3: "Pioneer Pharma Ltd." shows three peaks, with the middle
one highest. The price then broke below the line connecting the troughs,
signaling a major downturn.
• Scenario 4: "Global Steel Inc." shows a period of contracting range, with
lower highs and higher lows. The direction of the eventual price break is
currently unclear.
• Scenario 5: "Sunrise FMCG Ltd." exhibits a pattern where the price highs
are consistently falling while the price lows are consistently rising,
causing the trading range to narrow over time.

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Required:
From the five scenarios described above, identify and name the specific
m
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technical price pattern being formed for any four. (4 Marks)

o m m
c
. to be adopted by both the companies:
Answer

m s e
e• AB Ltd. – Buying Cap Option
(a) (i) Strategy
s l a
g a
l • XY Ltd. – Buying Floor Option ag
a
(ii) Premium paid by both companies
First of all we shall calculate premium payable to bank as follows:

rp rp
P= X A or ×A
 1  PVAF(4.00%,10)
(1÷i)- i×(1+i)t 
 

m
co
Where
.
em
P = Premium

l
A = Principal Amount
a s
ag
rp = Rate of Premium
i = Fixed Rate of Interest
t = Time
For AB Ltd.
0.004 1
= × 5,000,000 or × 5,000,000 x 0.4%
 1  8.1108
(1/ 0.04)- 0.04×1.0410 
m
m .co
c. o m
= ` 2465.85 or ` 2,466

em
For XY Ltd.
la se
las 0.005 1
a g
g
= × 20,000,000 or × 2,000,000 x 0.5%
a
 1  5.2421
(1/ 0.04) - 0.04 × 1.046 

= ` 1907.63 or ` 1,908

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FINAL EXAMINATION: JANUARY 2026

(iii) Net Gain/ Loss due to hedging to both the companies
AB Ltd.

Gain on Interest for Cap Option 2%
Amount of Gain ` 5 millions x 2% x (1/2) ` 50,000
Less: Premium Paid ` 2,466
Net Gain ` 47,534

XY Ltd.

Gain on Interest for Cap Option 2%
Amount of Gain ` 2 millions x 2% x (1/2) ` 20,000
Less: Premium Paid ` 1,908
Net Gain ` 18,092

Alternative Solution if students have considered reset period (n-1)
(i) Strategy to be adopted by both the companies
• AB Ltd. – Buying Cap Option
• XY Ltd. – Buying Floor Option
(ii) Premium paid by both companies
First of all we shall calculate premium payable to bank as follows:

rp rp
P= X A or ×A
 1  PVAF(4.00%,9)
(1 ÷ i) - 
 i × (1 + i) t 

Where
P = Premium
A = Principal Amount
rp = Rate of Premium
i = Fixed Rate of Interest
t = Time
For AB Ltd.

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0.004 1
= × 5,000,000 or × 5,000,000 x 0.4%
 1  7.4353
(1/ 0.04) - 0.04 × 1.049 
m
m c. o
co m
= ` 2689.87 or ` 2,690

m . s e
a
For XY Ltd.

s e= g l
l a 0.005 1
a
ag
× 20,000,000 or × 2,000,000 x 0.5%
 1  4.4518
(1/ 0.04) - 0.04 × 1.04 
5

= ` 2246.28 or ` 2246
(iii) Net Gain/ Loss due to hedging to both the companies
AB Ltd.

Gain on Interest for Cap Option 2%

om
Amount of Gain ` 5 millions x 2% x (1/2) ` 50,000
Less: Premium Paid
. c ` 2,690
Net Gain
s em ` 47,310

g l a
a
XY Ltd.

Gain on Interest for Cap Option 2%
Amount of Gain ` 2 millions x 2% x (1/2) ` 20,000
Less: Premium Paid ` 2,246
Net Gain ` 17,754

(b) EVA = Operating Income – (Cost of Capital x Total Investment)
Total Investments
m
m . co
c. o m
Amount (` Lakhs)

s e200.00
em la 400.00
Net Worth

las Long Term Debts
g
a 100.00
ag Patent Rights
Total 700.00

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FINAL EXAMINATION: JANUARY 2026

300 400
WACC = 14 %× + 10% (1-0.30) ×
700 700
= 6% + 4% = 10%
EVA = Operating Income – WACC x Invested Capital
Taxable Income = ` 84 Lakhs/ (1 – 0.30) = ` 120 lakhs
Operating Income = Taxable Income + Interest
= ` 120 Lakhs + (` 400 Lakhs x 10%)
= ` 120 Lakhs + ` 40 Lakhs = ` 160 Lakhs
EVA = ` 160 Lakhs (1 – 0.30) – 10% x ` 700 Lakhs
= ` 42 Lakhs
Maximum Dividend = ` 42 Lakhs/7,00,000 = ` 6.00
(c)
 Scenario 1 - Channel
 Scenario 2 – Flag
 Scenario 3 – Head & Shoulders
 Scenario 4 – Triangle or Coil
 Scenario 5 – Wedge
Question 5
(a) Mrs. SRS is your HNI Client and wants to invest in stock market. She has
got the following information about individual securities and wants to
select the securities to form an optimal portfolio from amongst these
securities:
(b)
Security Expected Return (%) Unsystematic Risk (%) Beta
A 5 25 0.5
B 25 20 2.5
C 15 10 1.0
D 10 10 1.5
E 20 18 1.8

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Market Index Variance is 25% and the Risk Free Rate of Return is 7%.
Required:
m
m
Based on this information help Mrs. SRS to:

o c. o
(i)
.c
Prepare ranked table using Treynor's Ratio.
e m
m a s
(iii)seIdentify the securities to be included in optimal portfolio. (8 Marks) gl
(ii) Calculate Cut-off Point.

a
(b)glMITU Ltd. wants to expand business outside India. For the project installation
a
a US funds $ 14.775 Million are required. Company wants to raise money by
issue of GDRs.
Following information is available:
(1) 7 shares shall underly each GDR.
(2) GDR shall be priced at 7% discount to market price.
(3) Market Price of share is ` 500 (Face Value ` 100) per share.
m
c. o
(4) Expected exchange rate is $1= ` 81.3750.

em
(5) Dividend expected to be paid is 15% with growth rate 10%.

la s
(6) Flotation Cost of GDR is 1.5%.

g
Compute the number ofa GDRs to be issued and cost of the GDR to the
Required:

company.
(Note: Calculate in lacs with four decimals). (6 Marks)
Answer
(a) (i) Ranked table using Treynor’s Ratio

m
Security Ri Ri - Rf Ri - Rf Ranking
o
βi

m .c
βi

c. o A 5 0.5 -2 -4
7.20 s
em5
s em B 25 2.50 18
l a 3

gla C 15 1.00 8
a2.00g
8.00 1

a D 10 1.50 3 4
E 20 1.80 13 7.22 2

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FINAL EXAMINATION: JANUARY 2026

(ii) Calculation of Cut-off Point
Security R i - R f βi σ 2 ei (R i - R f ) x β i N
(R i - R f ) x β i β i2 N
β i2 Ci
2
σ ei ∑
e=i σ 2 ei σ 2 ei
∑σ
e=i
2
ei

C 8 1.0 10 0.80 0.80 0.10 0.10 5.71
E 13 1.80 18 1.30 2.10 0.18 0.28 6.56
B 18 2.50 20 2.25 4.35 0.313 0.593 6.87
D 3 1.50 10 0.45 4.80 0.225 0.818 5.59
A -2 0.50 25 -0.04 4.76 0.01 0.828 5.48

CC = 25 x 0.80 / [1 + (25 x 0.10)] = 5.71
CE = 25 x 2.10 / [1 + (25 x 0.28)] = 6.56
CB = 25 x 4.35 / [1 + (25 x 0.593)] = 6.87
CD = 25 x 4.80 / [1 + (25 x 0.818)] = 5.59
CA = 25 x 4.76 / [1 + (25 x 0.828)] = 5.48
Cut-off Point: 6.87
(iii) The stock whose excess-return to risk ratio (Treynor ratio in (i) above)
is above the cut-off point of 6.87 are selected and whose ratios are
below are rejected. Hence Security C, E & B are selected in the optimal
portfolio while remaining securities i.e D & A are rejected as they are
placed below the cut-off point.
(b) Net Issue Size = $14.775 million
$14.775 million
Gross Issue = = $ 15 million
0.985
Issue Price per GDR in ` (500 x 7 x 93%) ` 3255
Issue Price per GDR in $ (` 3255/ ` 81.3750) $ 40
Dividend Per GDR (D1) (` 15 x 7) ` 105
Net Proceeds Per GDR (` 3255 x 0.985) ` 3206.18
$15 million
(a) Number of GDR to be issued =
$40
= 0.375 million/3.75 Lakhs /3,75,000
105.00
(b) Cost of GDR to X Ltd. ke = + 0.10 = 13.27%
3206.18
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Question 6
(a) Stork Capital, a SEBI Registered Mutual Fund, launched its first New Fund
m
c. o
Offer (NFO) on June 1, 2024, with a face value of ` 10 per unit. The fund

o m
received subscriptions for 180 lakh units.
m
.c s e
emto underwrite the entire issue of 200 lakh units for a commission of 2.0%. gla
An underwriting agreement was in place with Griffin Securities Ltd., which

s
a fund's financial activities are summarized below:
agreed
lThe a
g
a • Initial investments in various capital market instruments amounted to
` 1,780 lakhs.
• Marketing expenses for the NFO were ` 25 lakhs.
• During the financial year ended March 31, 2025, the fund sold securities
with a cost of ` 250 lakhs for ` 280 lakhs.

m
• The fund subsequently purchased new securities for ` 265 lakhs.
•
. co
Management expenses are regulated by SEBI and cannot exceed 0.50%

em
of the average funds invested during the year. The actual management

l a s
expenses incurred were ` 5.50 lakhs, of which ` 50,000 was outstanding
at year-end.
a g
• Dividends earned on investments amounted to ` 5.0 lakhs, of which
` 40,000 was yet to be collected.
• The fund's policy is to distribute 80% of all realized earnings (capital
gains and dividends).
• The market value of the investment portfolio as of March 31, 2025, was
` 2,150.50 lakhs.

o m
c
Required:
m . as on
c. o m
e (6 Marks)
Determine the closing per unit Net Asset Value (NAV) of the fund
s
em la to two decimal
March 31, 2025. Show all necessary workings.

las a g
(Note: Round off all intermediate and final calculations

ag places.)

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FINAL EXAMINATION: JANUARY 2026

(b) Indian manufacturer TEJ Ltd. has just completed new project. Based on
capital budgeting evaluation of the project Present Value is ` 500 Lakhs
without the abandonment option.
However, due to geopolitical issues and international trade war the project
may be at risk and company may have to discontinue the project. It is
estimated that if favourable conditions remain, Present Value of the project
shall increase by 20%. Whereas, if international trade war continues due to
geopolitical issues the Present Value of proposal shall reduce by 30%. In case
company is not interested to continue the project it can be disposed off for
` 450 Lakhs to avoid future huge losses.
The risk-free rate of interest is 8%.
Required:
Calculate the value of abandonment option using risk neutral method.
(4 Marks)
(c) Enumerate the role of government in thriving a sustainable environment for
the start-ups in India. (4 Marks)
OR
(c) A Special Purpose Vehicle (SPV) has acquired a large pool of assets and
intends to issue securities to investors. The structure of the deal wants to
design instruments that can cater to different investor needs. They are
considering three alternative structures:
(1) A simple structure where all cash flows (principal and interest) from the
assets are passed on directly to investors on a proportional basis.
(2) A more flexible structure where the SPV can issue its own debt securities
with varying maturities, allowing it to manage reinvestment of surplus
funds from prepayments.
(3) A highly specialized structure where the cash flows from the underlying
assets are split into their constituent principal and interest components,
which are then sold as separate securities.
As a financial advisor, explain the technical name for each of these three
securitization instrument structures and describe their key characteristics.
(4 Marks)

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Answer
(a) Working Notes:
m
c. o
(1) Computation of Opening Cash Balance
m
.co
Particulars Amount
s em
m
e Proceeds from NFO (200 Lakh units @ ` 10)
(` in Lakhs)
l a
a s
l Less: Initial Purchase of Securities
2000.00
ag
ag Less: Underwriting Commission (2% of 2000)
(1780.00)
(40.00)
Less: Meeting Expenses (25.00)
Opening Cash Balance 155.00
(2) Management Expenses
Amount
(` in Lakhs)

o m
c
A. Actual Expenses Incurred 5.50

m. Funds)
B. SEBI Limit (0.50% of Average

s e
a
- Opening Investment 1780.00

g l (1780 – 250 + 265)
a
- Closing Investment 1795.00
- Average Fund Invested 1787.50
- SEBI Limit (0.50% of ` 1787.50) 8.94
Chargeable Expenses (Lower of A or B) 5.50
Less: Amount unpaid (Outstanding) (0.50)
Management Expenses Paid 5.00

(3) Computation of Closing Balance
m
m Particulars
c. o
Amount

c. o m
se 155.00
(` in Lakhs)

s em Opening Cash Balance
g la
gla Add: Cash Inflows a
a Proceeds from Sale of Securities 280.00
Dividend Received (` 5.00 Lakh Earned – ` 0.40 Lakh 4.60
uncollected)

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FINAL EXAMINATION: JANUARY 2026

Less: Cash Outflows
Cost of New Securities Purchased (265.00)
Management Expenses (5.00)
Capital Gains Distributed [80% of (` 280 sale – ` 250 (24.00)
cost)]
Dividend Distributed (80% of ` 5.00 Lakh total earned) (4.00)
Closing Cash Balance 141.60

Net Asset Value (NAV) as on March 31, 2025

Particulars Amount
(` in Lakhs)
Assets:
Closing Cash Balance 141.60
Closing Market Value of Investment 2150.50
Accrued Dividends (Receivable) 0.40
Total Assets 2292.50
Less: Liabilities
Outstanding Management Expenses (0.50)
Closing Net Assets (A) 2292.00
Total Units Outstanding (in Lakhs) (B) 200.00
NAV per Unit (A/B) ` 11.46

Alternative Solution: In case dividend has been paid excluding the
dividend receivable from the Dividend Income then solution will be as
follows:
Working Notes:
(1) Computation of Opening Cash Balance

Particulars Amount
(` in Lakhs)
Proceeds from NFO (200 Lakh units @ Rs. 10) 2000.00
Less: Initial Purchase of Securities (1780.00)

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m
m .co
c. o

e m
em l a s
s a g
ADVANCED FINANCIAL MANAGEMENT

Less: Underwriting Commission (2% of 2000) (40.00)
Less: Meeting Expenses (25.00)
m
m c. o
Opening Cash Balance 155.00

.co
(2) Management Expenses
s em
em l a
l a s Amount
a g
ag
(` in Lakhs)
A. Actual Expenses Incurred 5.50
B. SEBI Limit (0.50% of Average Funds)
- Opening Investment 1780.00
- Closing Investment (1780 – 250 + 265) 1795.00
- Average Fund Invested 1787.50
- SEBI Limit (0.50% of ` 1787.50) 8.94
Chargeable Expenses (Lower of A or B) 5.50
m
co
Less: Amount unpaid (Outstanding) (0.50)
.
em
Management Expenses Paid 5.00
(3) Computation of Closing s
la
Balance

Particulars
a g Amount
(` in Lakhs)
Opening Cash Balance 155.00
Add: Cash Inflows
Proceeds from Sale of Securities 280.00
Dividend Received (` 5.00 Lakh Earned – ` 0.40 Lakh 4.60
uncollected)

m
c. o
Less: Cash Outflows

m
c. o
Cost of New Securities Purchased (265.00)
m
se (24.00)
Management Expenses (5.00)

s em Capital Gains Distributed [80% of (` 280 sale – ` 250
g la
gla cost)]
a
a Dividend Distributed (80% of ` 4.60 Lakh total
realised)
(3.68)

Closing Cash Balance 141.92

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FINAL EXAMINATION: JANUARY 2026

Net Asset Value (NAV) as on March 31, 2025

Particulars Amount
(` in Lakhs)
Assets:
Closing Cash Balance 141.92
Closing Market Value of Investment 2150.50
Accrued Dividends (Receivable) 0.40
Total Assets 2292.82
Less: Liabilities
Outstanding Management Expenses (0.50)
Closing Net Assets (A) 2292.32
Total Units Outstanding (in Lakhs) (B) 200.00
NAV per Unit (A/B) ` 11.46

(b) Decision Tree showing pay off
Year 0 Year 1 Option Pay off
600 0
500
350 450-350 = 100
First of all we shall calculate probability of high demand (p) using risk
neutral method as follows:
8% = p x 20% + (1-p) x (-30%)
0.08 = 0.20 p - 0.30 + 0.30p
0.38
p= = 0.76
0.50
The value of abandonment option will be as follows:
Expected Payoff at Year 1
= p x 0 + [(1-p) x 100]
= 0.76 x 0 + [0.24 x 100] = ` 24 Lakhs
Since expected pay off at year 1 is ` 24 Lakhs. Present value of expected
pay off will be:

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m
m .co
c. o

e m
em l a s
s a g
ADVANCED FINANCIAL MANAGEMENT

24.00
= ` 22.22 Lakhs
1.08

m
c. o
This is the value of abandonment option (Put Option).

m
co m
(c) (i) Start-up India & Stand-Up India scheme was initiated by the

m .
Government of India in 2016. It helped in creating widespread
s e
s e g
awareness in general public about start-ups and gave boost to the
l a
l a a
ag (ii) Government
entrepreneurial mind-set.
set up a fund called SIDBI-run Electronic Development
Fund (EDF) and became a limited Partner (LP) in a fund.
(iii) Easy Finance options such as Mudra Scheme, tax benefits such as 100%
tax holiday under section 80-IAC and exemption from angel taxation
also provided much needed push to the young start-ups.
(iv) The Department of Promotion of Industry and Internal Trade (DPIIT)
created the Start-up India Seed Fund Scheme (SISFS) to provide
m
c. o
financial assistance to start-ups for proof of concept, prototype
development, product trials, market entry, and commercialization.

s em incorporated not more than two years
a and having a business idea to develop a
(v) A start-up, recognized by DPIIT,

g l
ago at the time of application
product or a servicea with a market fit, viable commercialization and
scope of scaling, can apply for SISFS and get a seed fund of as much
as INR 50 Lakhs.
(c) (OR)
(1) Pass Through Certificates (PTCs): Key characteristics of these
instruments are as follows:

m
• These securities represent direct claim of the investors on all the

m
assets that has been securitized through SPV.
.c o
c. o em
• Since all cash flows are transferred, the investors carry proportional
s
em la of assets, all
beneficial interest in the asset held in the trust by SPV.

las a g
• On completion of securitization by the final payment

ag the securities are terminated simultaneously.
• Skewness of cash flows occurs in early stage if principals are repaid
before the scheduled time.

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FINAL EXAMINATION: JANUARY 2026

(2) Pay Through Security (PTS): Key characteristics of these instruments are
as follows:
• It can restructure different tranches from varying maturities of
receivables.
• This structure permits desynchronization of servicing of securities
issued from cash flow generating from the asset. Further, this
structure also permits the SPV to reinvest surplus funds for short
term as per their requirement.
• In case of early retirement of receivables the surplus cash can be
used for short term yield.
• This structure also provides the freedom to issue several debt
tranches with varying maturities.
(3) Stripped Securities: Stripped Securities are created by dividing the cash
flows associated with underlying securities into two or more new
securities. Those two securities are as follows:
(i) Interest Only (IO) Securities
(ii) Principle Only (PO) Securities
Key characteristics of these instruments are as follows:
• As each investor receives a combination of principal and interest,
it can be stripped into two portion of Interest and Principle.
• Being highly volatile in nature these securities are less preferred
by investors.
• In case yield to maturity in market rises, PO price tends to fall as
borrower prefers to postpone the payment on cheaper loans.
• Whereas if interest rate in market falls, the borrower tends to repay
the loans as they prefer to borrow fresh at lower rate of interest.
• In contrast, value of IO’s securities increases when interest rate
goes up in the market as more interest is calculated on borrowings.
• When interest rate due to prepayments of principals, IO’s tends to
fall.

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