Question 6 a) Do life and general insurance companies have different uses of funds? If so, explain how they differ and what the reasons for this difference are. If not, exxplain how life and 9general insurance providers invest their funds. b) Explain the rationale behind capital adequacy requirements underpinning the Basel III accord. What is their purpose, and how do they restrict the operations of banks. In your answer use a hypothetical excample to show how capital adequacy standards work in an Australian setting. Please ensure that your answer is succinct and to the point, and be mindful of the word limit for the excam. [3+4]=7 marks END OF EXAMINATION

a) Deakin Hedge Fund has substantial position in Tenca shares. The share price has been volatile over the past 6 months, and a group of equity analysts working in the fund believe that the price may drop substantially over the next 4 months before recovering. Suggest two risk minimization strategies that Deakin Hedge Fund can be adopted. In your answer explain the derivative product that would be used, the position taken, and the cash flows at maturity.

a)A company requires funding for a new factory. The company only has access to a debt facility that offers floating rate loans. However, given that the company is concerned about interest rates potentially rising in the future, it prefers a fixed rate loan. Provide advice to the company on its options. (Ctr)-

a)John bought an option contract on BHP shares with an exercise price of S50 and an expiry date in one month. The market price for BHP shares today is S47.81. The call price is trading at \$0.35.1 Calculate the break-even amount for the call position and draw a fully labelled diagram for both buyer of the option and seller of the option.. At what minimum share price will the option buyer exercise the option on the expiration date? Provide reasoning in your answer. (Ctr)

1. (a) Evaluate the following integra 3x dr.10-7x+x2 )Let P(, y) be a general point on the quartic polynomial y = and let Q be the point(3,)as shown in the sketch below.y y=(,y)Q(3,0) (i) Write down an expression for the distance between P and Q in terms of: (ii)Show that has a critical point at the value of which satisfies the polynomial equation 4x+x-3=0: (ii) Without actually finding r, show that the solution of this equation lies in the interval [0.3: (iv)Show that (is a (global) minimum at this r value. (v)Use Newton’s method, with an initial guess of 1.5 to find an approxi- mation(accurate to two decimal places)to the solution of4x7+x-3=0 (Newton’s method for solving /()=0 In+=I.-5(x.) for n=0. 1, 2,…) ‘()

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Part b) The table below provides stock market information for three different countries. Country A Country B Country c Buyers and sellers’ access to Perfect semi perfed imperfect information about companies is Cost of buying and selling shares Low Moderate High In your opinion, in which country will the difference between market price and value of share be biggest and which country it will it be smallest? Explain Why. Answer:

(i) Use the linear appraximation formula△y≈f(x)△x orf(x+△x)≈f(x)+f(x)△x with a suitable choice of f() to show thatlog(1+50)≈50 for small values of1/10 (ii)Use the result obtained in part ( a)above to approcimate log(1+50) de.1/10 (ii)Check your result in (b)by evaluating log(+50) de exactly using in- tegration by parts ()An electromotive force (emf) of 100 sin 2t volts is applied to a circuit comprising a resistance of 5 ohms in series with an inductance of 20 henries. The current i(t) in the circuit at time t is given by20+5i=100sin2t. Initially (at t =0) the circuit is dead (i.e. i =0). (i) Solve the given linear differential equation to find i(t).(i) Hence, determine the’steady-‘cun-sate,ie. the current after consider- able time