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You own a portfolio with only two securities in it: Their tickers are JOA and MON. JOA and MON are in the same industry—but sell slightly different products, so that you get some diversification benefits from holding the two (specifically, the correlation between JOA and MON is 0.4). The portfolio is equally weighted between JOA and MON. This industry has recently been hit with bad news, but you believe that the market has over- reacted to this news and pushed the prices of all firms down too much— including JOA and MON. As a consequence of your beliefs, you have purchased call options on JOA and MON. The parameters of these call options for both stocks are: JOA MON Stock price 35 35 Strike price 40 40 Volatility 35% 40% Riskless rate (annual) 2% 2% Time to expiration 0.5 years 0.5 years a) Value the call options on JOA and MON. b) A financial institution offers to sell you a call option on your portfolio. On a per-share basis, the call option would sell for the average of the call option prices that you calculated in a), and would have a per share strike price of 40. This call would also have a six-month expiration. This strategy is offered as a substitute for buying individual call options on JOA and MON. Should you choose this alternative? Show your work.
If I lived in Canada and owned 1,000,000 shares of a United States company, if I sold my shares would I get the U.S. currency rate of my shares or Canada's currency rate? WHY? Also, how will the current inflation rate be a factor? Why?
A new project you are considering is expected to generate an operating cash flow of $45,620 and will initially free up $22,000 in net working capital. Purchases of fixed assets costing $68,800 will be required to start up the project. What is the tot..
Consider a European call option on a non-dividend-paying stock where the stock price is $52, the strike price $50, the risk-free rate is 5%, the volatility is 30%, and the time to maturity is one year. What is the value of the option to the buyer if..
For which values of the sample proportion would the sample data support the EPA's claim, using a 5% significance level?
5 years ago, Barton Industries issued 25-year noncallable, semiannual bonds with a $1,400 face value and a 5% coupon, semiannual payment ($35 payment every 6 months). The bonds currently sell for $845.87. If the firm's marginal tax rate is 40%, what ..
A bond was trading at $900 when interest rates were at 4% yesterday. Rates increased to 4.1% today causing the price to drop $18. Calculate the bond price elasticity for this $1000 par value bond.
Assume that you are considering the purchase of a 30-year, noncallable bond with a coupon rate of 4%. The bond has a face value of $1,000, and it makes semiannual interest payments. If you require a 5% yield to maturity on this investment, what is th..
Janet Gilbert is director of a lab. She has some extra capacity and has contracted with some small neighboring hospitals to run some of their lab tests. She has recently had a study conducted and has determined that her costs for these contracts are ..
What are the pros and cons of a centralized trading system with a clearinghouse?
We want to determine cost of equity for Firm A. We know that Firm A’s target debt-to equity ratio is 2.00. We also know that there is a comparable firm which has exactly same lines of business and therefore is expected to have the same level of busin..
Here are some important figures from the budget of Cornell, Inc. for the second quarter of 2013:
Your first job pays your $45,000 first year, $48,000 second year and $49,000 third year. Then you switch to another job and make $53,000 in the first year. Your pay increases by 4% for the next six years (10 years total). What is the Present Value (P..
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