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A European call option and put option on a stock both have a strike price of $20 and an expiration date in three months. Both sell for $3. The risk-free interest rate is 10% per annum, the current stock price is $19, and a $1 dividend is expected in one month. Is there an arbitrage opportunity? If there is an arbitrage opportunity, clearly state what condition must be satisfied to eliminate the arbitrage opportunity. What is the strategy followed to make a profit from the arbitrage opportunity? What is the profit expressed as a present value?
What are the duration and modified duration of a seven-year, 3.5 percent coupon rate, annual coupon payment, $1000 par value government note priced today to yield 3 percent to maturity. What is the convexity of this instrument?
Assuming no corporate taxes, the independence hypothesis suggests that a firm's weighted average cost of capital will. The EBIT-EPS indifference point
Defines how solvency and liquidity differ and provides an example of two companies. As a financial manager, what can you do to make sure your company stays solvent and is not too liquid?
Discuss the role of a third party intermediary in an interest rate swap agreement. Describe the risks assumed by the intermediary. How does the intermediary potentially profit from this activity?
In 1884, the winner of a competition was paid $100. In 2015, the winner's prize was $375,000. What will the winner's prize be in 2040 if the prize continues increasing at the same rate? (Round your answer to the nearest $500.)
After six months go by, you receive the first interest payment of $300. The annual market interset rate has declined to 5 percent and you decide to sell the bond. What is the bond's present value when you sell it? show your work.
A bond has a par value of $1,000, a time to maturity of 15 years, and a coupon rate of 8.90% with interest paid annually. If the current market price is $890, what will be the approximate capital gain of this bond over the next year if its yield to m..
Kaylee wants to buy a machine shop on Beaumonde and someday retire from space flight. She purchases a contract to buy a little shop 14 years from today. At that time, it will be worth $10,000. What is the shop worth to Kaylee today? Kaylee has a disc..
For a given set of possible cash flows, as the required risk premium for a project increases, its price must decrease to entice investors to purchase the asset. (Hint: What is the price and expected return (premium) relation?) Eurodollars are dollar-..
Nora Fashion Corp. is thinking to acquire Sally Shoes Corp. The presence of marketing synergies will produce an estimated additional value of $9,259,259. The gain from the synergies will be shared equally between the shareholders of two companies. Ho..
Explain how a OBHC differs from a MBHC. How does each of these differ from a financial services holding company?
Bradford Manufacturing Company has a beta of 1.2, while Farley Industries has a beta of 0.3. The required return on an index fund that holds the entire stock market is 11.5%. The risk-free rate of interest is 6.75%. By how much does Bradford's requir..
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