CMFAS CACS – Client Advisor Competency Standards (CACS) ​Paper 2 Exam Set Two

The average coupon rate is calculated as:
\[
\text{Average Coupon Rate} = \frac{4.5\% + 5.0\% + 6.0\% + 7.0\%}{4} = \frac{22.5\%}{4} = 5.5\%
\]
This calculation provides the mean coupon rate of the bonds in the portfolio. The Singapore CMFAS regulations emphasize accurate and transparent reporting of bond characteristics, including average coupon rates, to ensure proper investment evaluation.

Liquidity risk is associated with the difficulty of buying or selling assets without affecting their price significantly. Small-cap stocks, being less liquid, can lead to higher transaction costs and difficulty in executing trades efficiently. The Securities and Futures Act (SFA) requires that risks associated with liquidity be disclosed to ensure investors are well-informed.

The yield to maturity (YTM) is calculated using the formula:
\[
\text{YTM} \approx \frac{\text{Coupon Payment} + \frac{\text{Face Value} – \text{Current Price}}{\text{Years to Maturity}}}{\frac{\text{Current Price} + \text{Face Value}}{2}}
\]
Substituting the values:
\[
\text{YTM} \approx \frac{60 + \frac{1000 – 950}{5}}{\frac{950 + 1000}{2}} = \frac{60 + 10}{975} \approx 0.068 \text{ or } 6.8\%
\]
Accurate calculation of YTM is crucial as per CMFAS guidelines to ensure proper valuation and return expectations.

Diversification reduces risk by spreading investments across various asset classes. In this portfolio, the investments are spread across three sectors, but a significant concentration in financial stocks suggests moderate diversification. CMFAS guidelines stress diversification to manage and mitigate investment risks effectively.

The Total Expense Ratio (TER) represents the annual cost of managing a mutual fund, expressed as a percentage of the fund’s average assets under management. According to CMFAS regulations, understanding TER is vital for assessing the cost efficiency of the fund.

Currency risk arises from fluctuations in exchange rates affecting the value of foreign-denominated assets. Currency hedging techniques, such as forward contracts or options, can help mitigate this risk. CMFAS guidelines require proper risk management strategies to protect investors from currency volatility.

The net annual return is calculated by subtracting the total expense ratio from the average annual return:
\[
\text{Net Annual Return} = \text{Average Annual Return} – \text{Total Expense Ratio} = 8\% – 1.2\% = 6.8\%
\]
CMFAS regulations require clear reporting of net returns to ensure transparency and proper investor evaluation.

Derivatives are primarily used for hedging, speculation, and enhancing leverage. They do not typically reduce transaction costs; in fact, they can sometimes increase them. CMFAS guidelines emphasize understanding the purpose and risks of derivatives in investment strategies.

Larger fund sizes can lead to capacity constraints, making it difficult to manage large transactions without impacting performance. CMFAS regulations require careful evaluation of fund size and capacity to ensure effective management and performance.

High transparency in fund reporting includes detailed disclosure of investment strategies, risks, and performance metrics. This ensures investors have a clear understanding of the fund’s operations and potential risks. According to CMFAS guidelines, transparency is crucial for investor protection and informed decision-making.

Since Mr. Tan expects the USD to strengthen against the EUR, he should buy USD and sell EUR. This is because if the USD strengthens, he will gain from holding USD and converting it to EUR at a more favorable rate in the future. The Securities and Futures Act (SFA) governs such transactions, ensuring transparency and fair dealing in the foreign exchange market.

To calculate the cross rate for GBP/JPY, use the formula: Cross Rate = GBP/USD USD/JPY. Thus, the cross rate = 1.30 110.00 = 143.33. This calculation is crucial for understanding foreign exchange conversions, as stipulated under the Singapore CMFAS regulations.

The bid-offer spread is calculated as Offer Price – Bid Price. Therefore, the spread is 1.2550 – 1.2500 = 0.0050, which equals 5 pips. The SFA requires that bid-offer spreads be clearly disclosed to ensure fair pricing in the foreign exchange market.

To determine the total amount in USD, multiply the forward rate by the amount in EUR: 1,000,000 EUR 1.1200 USD/EUR = 1,120,000 USD. This is in line with the forward foreign exchange contracts guidelines set by the CMFAS for transparent and accurate foreign exchange transactions.

The gain or loss is calculated by finding the difference between the buying and selling rates. The amount in USD is (1,000,000 JPY / 110.00) – (1,000,000 JPY / 108.00) = 9,090.91 – 9,259.74 = -168.83 USD. Convert this to USD by multiplying by the difference: Gain = (1,000,000 / 110) – (1,000,000 / 108) = 18,181.82 USD. This complies with the CMFAS regulations on foreign exchange gain and loss reporting.

To calculate the total amount in EUR, use the formula: Total EUR = Amount in USD / Forward Rate. Thus, 5,000,000 USD / 1.1050 USD/EUR = 4,528,925 EUR. This calculation adheres to the CMFAS guidelines for forward foreign exchange transactions.

The bid-offer spread is calculated as Offer Price – Bid Price. Therefore, the spread is 0.7585 – 0.7550 = 0.0035, which equals 35 pips. This follows the CMFAS regulations on currency spread disclosure.

To find the amount to pay, multiply the forward rate by the amount in USD: 500,000 USD 1.3450 = 672,500 USD. This amount needs to be converted to the payment in USD: 500,000 / 1.3450 = 335,400.00 USD. This adheres to the forward foreign exchange contract guidelines under CMFAS.

The breakeven point for a call option is calculated as Strike Price + Premium. Therefore, the breakeven rate = 1.2500 + 0.0200 = 1.2520. This calculation follows CMFAS guidelines on options and their pricing mechanisms.

The settlement date for a forward contract is determined by adding the contract period to the spot date. For a 90-day contract starting from August 15, the settlement date would be November 15. This is in line with the CMFAS regulations for forward contract settlements.

ROA is calculated using the formula:

\[
\text{ROA} = \frac{\text{Net Income}}{\text{Total Assets}} \times 100
\]

Substituting the given values:

\[
\text{ROA} = \frac{1,200,000}{10,000,000} \times 100 = 12\%
\]

The ROA provides insight into how effectively a company is using its assets to generate profit. According to the Singapore CMFAS guidelines under the Securities and Futures Act, understanding financial ratios like ROA is crucial for assessing a company’s performance.

Management fee:

\[
\text{Management Fee} = 50,000 \times 0.015 = SGD 750
\]

Performance fee calculation:

\[
\text{Excess Return} = 8\% – 5\% = 3\%
\]

\[
\text{Performance Fee} = 50,000 \times 0.03 \times 0.10 = SGD 150
\]

Total fees:

\[
\text{Total Fees} = 750 + 150 = SGD 900
\]

The total fees calculation is crucial for investors to understand the costs associated with their investments. The Securities and Futures Act requires transparency in fee structures to ensure fair practices.

The earnings quality ratio is calculated as:

\[
\text{Earnings Quality Ratio} = \frac{\text{Cash Flow from Operations}}{\text{Net Income}}
\]

Substituting the values:

\[
\text{Earnings Quality Ratio} = \frac{600,000}{500,000} = 1.20
\]

This ratio measures the reliability of earnings by comparing cash flow from operations to net income. Accurate earnings quality assessment helps in adhering to CMFAS regulations under the Securities and Futures Act.

The valuation using EBIT and cost of debt is given by:

\[
\text{Company Value} = \frac{\text{EBIT}}{\text{Cost of Debt}}
\]

Substituting the values:

\[
\text{Company Value} = \frac{2,000,000}{0.05} = SGD 40,000,000
\]

This approach helps in understanding the company’s value based on its earnings and cost of debt. It ensures compliance with CMFAS standards under the Securities and Futures Act for accurate financial assessments.

The current ratio is calculated as:

\[
\text{Current Ratio} = \frac{\text{Current Assets}}{\text{Current Liabilities}}
\]

Substituting the values:

\[
\text{Current Ratio} = \frac{1,200,000}{800,000} = 1.50
\]

This ratio assesses the company’s ability to pay off short-term liabilities with short-term assets, which is essential for compliance with CMFAS guidelines under the Securities and Futures Act.

Management fee calculation:

\[
\text{Management Fee} = \text{Investment Amount} \times 0.01
\]

Performance fee calculation:

\[
\text{Excess Return} = 10\% – 6\% = 4\%
\]

\[
\text{Performance Fee} = \text{Investment Amount} \times 0.04 \times 0.15
\]

Total fees:

\[
\text{Total Fees} = \text{Management Fee} + \text{Performance Fee}
\]

Accurate fee calculation is essential for investors to understand their total costs, aligning with CMFAS regulations.

Initial charge:

\[
\text{Initial Charge} = 100,000 \times 0.02 = 2,000
\]

Annual management fee:

\[
\text{Annual Fee} = 100,000 \times 0.012 = 1,200
\]

Total charge:

\[
\text{Total Charge} = 2,000 + 1,200 = 3,200
\]

Understanding charges is crucial for investors under CMFAS guidelines to ensure transparency and fairness in financial products.

ROE is calculated as:

\[
\text{ROE} = \frac{\text{Net Income}}{\text{Total Equity}} \times 100
\]

Substituting the values:

\[
\text{ROE} = \frac{450,000}{3,000,000} \times 100 = 15\%
\]

ROE assesses the company’s profitability relative to shareholder equity, in line with CMFAS requirements under the Securities and Futures Act.

The value of the forward contract is calculated as:

\[
\text{Value} = \text{Forward Rate} \times \text{Amount in USD}
\]

Substituting the values:

\[
\text{Value} = 1.30 \times 100,000 = 130,000
\]

Forward exchange contracts are used to hedge currency risk, with calculations aligned with CMFAS guidelines to ensure accuracy in financial transactions.

Operating profit margin is calculated as:

\[
\text{Operating Profit Margin} = \frac{\text{Gross Profit} – \text{Operating Expenses}}{\text{Gross Profit}} \times 100
\]

Substituting the values:

\[
\text{Operating Profit Margin} = \frac{500,000 – 200,000}{500,000} \times 100 = 25\%
\]

This margin helps in evaluating the company’s operational efficiency, adhering to CMFAS regulations for accurate financial analysis.