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A portfolio of derivatives on a stock has a delta of 2400 and a gamma of –100. An option on the stock with a delta of 0.6 and a gamma of 0.04 can be traded.
a) What position in the option creates a portfolio that is gamma neutral? Give size of position and state whether it is long or short.
b) After this position has been taken what position in the stock is then necessary for delta neutrality? Give size of position and state whether it is long or short.
You have the chance to participate in a project that produces the following cash flows: The internal rate of return is 10%. If the opportunity cost of capital is 11%, what is the NPV of the project?
Investment banking has changed dramatically. Some key players either went bankrupt or were bought out. The remaining two investment banks had to apply to become bank holding companies. However, the industry experienced something of a comeback. Goldma..
Lisa is considering making a 6-year loan of $15,000 to Carmax Inc. To repay Lisa, Carmax will pay $500 at the end of Year 1, $2,000 at the end of Year 2, and $2,500 at the end of Year 3, plus a fixed but currently unspecified cash flow, Y, at the end..
When Marilyn Monroe died, ex-husband Joe DiMaggio vowed to place fresh flowers on her grave every Sunday as long as he lived. The week after she died in 1962, a bunch of fresh flowers that the former baseball player thought appropriate for the star c..
The common stock of Leaning Tower of Pita Inc., a restaurant chain, will generate payoffs to investors next year, which depend on the state of the economy, as follows: The company goes out of business if a recession hits. Calculate the expected rate ..
The Shome Corporation, a firm in the 34 percent marginal tax bracket with a 15 percent required rate of return or cost of capital, is considering a new project. The project involves the introduction of a new product. Working-capital requirements Ther..
Calculate Touring Enterprises' weighted average cost of capital (WACC). Work as follows: first, compute the after-tax cost of debt, then compute the cost of equity. Cite both formulas, and show all your work.
Romo Enterprises needs someone to supply it with 127,000 cartons of machine screws per year to support its manufacturing needs over the next five years, and you've decided to bid on the contract. If your tax rate is 30 percent and you require a retur..
Storico Co. just paid a dividend of $1.30 per share. The company will increase its dividend by 20 percent next year and will then reduce its dividend growth rate by 5 percentage points per year until it reaches the industry average of 5 percent divid..
An explanation of your understanding of what loans really cost to consumers, and How you feel about adjustable rate mortgages (ARMs) and borrowing practices Please include information and topics from the chapter readings to justify your explanation a..
The firm is considering a proposal to extend credit to a new customer on an order totaling $75,000. The contribution margin on the order is 12.5%. What is the expected cash outflow from this order and when will it occur? What is the expected cash inf..
Assume a $1,000 Treasury bill is quoted to pay 5 percent interest over a six-month period. How much interest would the investor receive? What will be the price of the Treasury bill? What will be the effective yield?
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