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Suppose that you enter into a long position on a 6-month pound forward today and lock-in the price of $1.50 (the forward rate). If at the maturity (6 month from now) the spot rate turns out to be $1.62, what is your gain or loss? The contract size is 100,000 pounds.
This problem is useful for testing the ability of financial calculators and computer software. Consider the above cash flows. The IRRs, from smallest to largest, are____ percent, ___percent, ___percent, and ___percent.
Draw the profit diagrams at maturity for the following portfolios consisting of options. Clearly label all the important points in the diagrams.
You have been asked by the president of your company to evaluate the proposed acquisition of a new special-purpose truck for $320,000. The truck falls into the MACRS 10-year class, and it will be sold after 10 years for $57,000. The firm's marginal t..
The Flowering Vine buys hanging plants for $2 each and resells them for $8.95 each. The firm sells 3,500 plants per year. Generally, the firm orders 400 plants at a time and has a fixed cost per order of $28.
You own a bond with the following features: face value of $1000, coupon rate of 6% (semiannual compounding), and 15 years to maturity. The bond has a current price of $1,200. The bond is callable after nine years with the call price of $1100. What is..
The current price of a stock is $50. A call option on the stock has a premium of $5 and delta of 0.65. A trader writes 1 option contract where each option contract is on 100 shares of the stock. The trader delta-hedges his option position using the s..
A $1,000 par corporate bond with a coupon of 5% that pays interest semiannually is currently selling for $1,040. The current rate of return or current yield on this bond is. Bond Yield to Bond Coupon Maturity Rating Maturity A 5.2% 5 years AA 6.0% B ..
An investor owns $10,000 of Adobe Systems stock, $15,000 of Dow Chemical, and $25,000 of Office Depot. What are the portfolio weights of each stock? a. Adobe Systems = 0.3333, Dow Chemical = 0.3333, Office Depot = 0.3333. b. Adobe Systems = 0.2, Dow ..
Miltmar Corporation will pay a year-end dividend of $5, and dividends thereafter are expected to grow at the constant rate of 4% per year. The risk-free rate is 6%, and the expected return on the market portfolio is 14%. The stock has a beta of 0.88...
We have explored different capital structures. It is noted that initially, leverage can be the least expensive form of capital. However, if potential lenders feel a firm is overly leveraged, they may charge a punitive rate, or refuse to lend all toge..
What is meant by the time value of money, and what are two concepts we are learning about this week that may be relevant to the capital budgeting process?
A stock price is currently $50. It is known that at the end of 6 months it will be either $45 or $55. The risk-free interest rate is 10% per annum with continuous compounding. What is the value of a 6-month European put option with a strike price of ..
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