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Suppose that you believe that recent strong employment data (~ 180,000 jobs added in November!) together with the prospect of a tax cut for corporations and wealthy families means that the Fed will start to increase interest rates sooner and faster than it has indicated in its recent open market committee meetings. However, you don't know whether: 1) the bull market in equities since summer 2009 will continue to charge ahead because of increased household incomes and consumer confidence; or, 2) will experience a major downturn because of investors' fears that higher interest rates will discourage corporate spending on physical capital and will kill the real estate rally. You notice that neither call nor put option premiums on at the money strike prices on the S&P 500 index have changed noticeably from average levels for at the money premiums on the index over the last year.
a) Describe an options strategy that you might wish to apply that is consistent with your expectations.
b) What assumption are you making about the volatility of S&P 500 stock prices " implied" by the current level of option premiums on the index?
Suppose that all of the numbered diamonds and spades from a deck of cards (excluding Ace, King, Queen, and Jack) are used to set up a market. The diamonds determine demands, e.g., a 10 represents a buyer with a redemption value of $10. Graph supply a..
Assume that a 1- year discount bond (bond A) with a face value of $1,000 is currently trading at PV = $938.97, and another 2-year discount bond (bond B) with identical risk features and face value is currently trading at $834.01. Please calculate the..
Suppose that the demand in a particular industry is given by Qd = 500 − 2P. When the market price in the industry is $50 per unit, total demand in the industry is _________. Furthermore, assume that the entire market consists of four firms that share..
A German machine company sells industrial machinery and maintenance policies for the machine. There are four market segments. Figure 5-9 shows the size of each market segment and the amount each segment will pay for the machine separately, maintenanc..
Shane is required by his employer to work a standard eight-hour work day. Suppose his marginal rate of substitution (MRS) for leisure and income is less than the wage rate at this level of work. Comment about the nature of Shane’s employment.
Your president bought two acres of land for $200,000 ten years ago. Although it is zoned for commercial use, it currently holds eight small, single-family houses. A property management firm that wants to continue leasing the eight houses has offered ..
Compute the equilibrium level of income. Sketch this equilibrium position using a two-dimensional graph.
Explain the effects of a tax on consumer and producer surplus. Explain what happens to total welfare when government levies a per-unit tax on a good. Use the concept of deadweight loss in your explanation.
Consider the following demand curve, Qd = 100 – 2P and supply curve Qs = 8P-120. Find the equilibrium price, quantity, and producer surplus. In turns out that the production of the firm causes pollution. The Marginal Social Cost curve, Qs = 8P – 200...
A fleet manager must choose between two trucks to purchase for a company's fleet. The company will keep either truck for 5 years. Truck A costs $28,000 and has a market value of $16,000 after 5 years. Truck B costs $34,000 and has a market value of $..
Describe each of the following financial institutions. If it is a financial intermediary, describe what type of liabilities it issues and who holds these liabilities, as well as what kinds of assets it holds and who issued these assets. If it is not ..
What economic considerations must individuals take into account in making the decision to open a business?Coporate Finance
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