Therefore, the equal annual amount you and your friends would invest,
C
, would be:
(
)
(
)
1
1
n
n
r FV
C
r
=
+
−
(
)
10
0.10(129 687)
$8137
1
0.10
1
C
=
=
+
−
Return to
Question A3.1
to continue reading.
MODULE 3
254

FINANCING AND EVALUATING INVESTMENTS
Question A3.2
(a) The future value of your investment at the end of year 5 is:
F
5
= 120 000 (1 + 0.08)
5
= $176 319
(b) With monthly compounding, the amount you would need to invest today will be less
than $120 000 because interest is compounded on a monthly, rather than annual, basis.
The amount needed is calculated by taking the present value of $176 319 and then
accounting for the monthly (compound) interest rate of 0.6667 per cent (i.e. 8% / 12)
and the total time horizon of 60 months (i.e. 5 × 12), as follows:
P
0
= 176 319 / (1 + 0.08 / 12)
5 × 12
= $118 347
(c)
The effective annual interest rate you are earning on your investment in part (b) is calculated as:
r
e
= (1 +
r
/
m
)
m
– 1
r
e
= (1 + 0.08 / 12)
12
– 1
r
e
= 8.3%
(d) (i)
Calculating the value of the $24 000 annual annuity at the end of year 5, where interest is
compounded on an annual basis, involves using the future value of an annuity, as follows:
(
)
5
5
24 000
1
0.08
1
$140 798.
0.08
FV
=
+
−
=
(ii)
To calculate the future value of the $24 000 annual annuity at the end of year 5, where
interest is compounded on a monthly basis, use the effective annual interest rate of
8.3 per cent from part (c) rather than the stated interest rate of 8 per cent. (Interest is
compounded on a monthly, rather than annual basis, while the annuity occurs annually.)
The future value of the annuity is:
(
)
5
5
24 000
1
0.083
1
$141643.
0.083
FV
=
+
−
=
Return to
Question A3.2
to continue reading.
MODULE 3
REFERENCES

255
References
References
ASX (Australian Securities Exchange) 2016, ‘ASX listing rules’, accessed May 2018,
.
com.au/regulation/rules/asxlistingrules.htm
.
ASX (Australian Securities Exchange) 2017,
ASX Limited: Annual Report 2017
, accessed May 2018,
.
Debelle, G. 2014, ‘The Australian bond market’, speech to the Economic Society of Australia,
Reserve Bank of Australia, Canberra, 15 April, accessed May 2018,
speeches/2014/spag150414.html
.
Lowe, P. 2014, ‘Opportunities and challenges for marketbased financing’, speech to the
ASIC Annual Forum 2014, Reserve Bank of Australia, Sydney 25 March, accessed May 2018,
.
PAIB (Professional Accountants in Business) Committee 2008,
Project Appraisal Using Discounted
Cash Flow,
International Federation of Accountants, New York, accessed May 2018,
.
iaasb.org/system/files/publications/files/ProjectAppraisalUsingDCF.pdf
.
WFE (World Federation of Exchanges) 2016,
Monthly Reports
, August, World Federation of
Exchanges, London.
MODULE 3
FINANCIAL RISK MANAGEMENT
Module 4
DERIVATIVES
PETER HUMPHREY AND RICHARD ALLAN*
*
Updated by Brett Dobeson and Lei Xu.
MODULE 4
258

DERIVATIVES
Contents
Preview
259
Introduction
Objectives
The role of derivatives in financial risk management
260
Extent of derivatives use
The three main categories of derivatives
Implications of derivatives use for risk management
Earnings at risk and value at risk
Risk appetite
Basis risk