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Suppose that there are two securities, RAIN and SUN. RAIN pays $100 if there is any rain on the day of the soccer world cup final, $0 otherwise. SUN pays $100 if there is no rain, $0 otherwise. Suppose the soccer world cup final is 1 year from today, and suppose that RAIN is trading at a price of $23 and SUN is trading at a price of $70.
(a) If you buy 1 share of RAIN and 1 share of SUN, what is your payoff after 1 year, depending on the weather?
(b) What does the No-Arbitrage Condition imply about the price of a 1-year zero coupon bond with face value $100 (Assume no trading costs.)
(c) Suppose that a 1-year zero coupon bond with face value $100 is trading at $90. Show how you would set up a transaction to earn a risk less arbitrage profit (Assume no trading costs).
(d) Suppose that trading zero-coupon bonds is costless, but trading RAIN and SUN each cost $2 per $100 face value. Can you still make an arbitrage profit?
A corporation is considering expanding operations to meet expanding demand. With the capital expansion, the current accounts are anticipated to change.
Stock A has expected return of 12 percent and standard deviation of 40 percent. Stock B has an expected return of 18% and standard deviation of 60%. The correlation coeffecient between stocks A and B is 0.2.
One British pound can buy 1.62 U.S. dollars today in foreign exchange market and currency forecasters predict that U.S. dollar will depreciate by 12 percent against the pound over next 30 days.
K&k Corporation had the following results for this year: Sales of $20,000; assets of $10,000: Current liabilities of $200; Return on Sales of 10 percent.
why would one want to se a rent to own store for mechandise ? think of at least three reason and record them below.
A guy buys a car for $21,000 and finances it with a fiveyear, 7% APR with monthly payments and compounding. How much of histhird payment goes toward repaying principal?
Chase Econometrics has just published projected inflation rates for the United States and Euro-zone for the next five years. U.S. inflation is expected to be 2% per year, and Euro-zone inflation is expected to be 3.5% per year.
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A company's capital structure consists solely of debt and common equity. It can issue debt at rd=11%, and its common stock currently pays a $2.00 dividend per share (Do=$2.00).
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Find the qualified plans for Thomas to establish.
Discuss two factors that may affect a person's credit score and apply the notion of moral hazard to your response.
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