the price of a stock on July 1 is $30. A trader buys 100 call options on the stock with a strike price of $34 when the option price is $2. The options are exercised when the stock price is $40. The trader's net profit is ?
Q: A buyer for a large sporting goods store chain must place orders for professional footballs with the…
A: a) Let us consider the following given above data Here we first construct the payoff table. We know…
Q: There are three investments, B1, B2 and B3. All of them have the same expected value and each with…
A: Given data is
Q: Limitations of Portfolio analysis
A: Portfolio management is the art and science of selecting and overseeing a group of investments…
Q: Assume that prices for a non-dividend-paying stock follow the lognormal model. The current price of…
A: Introduction: The term Business refers to an exchange of goods and services between the buyer and…
Q: The finance function is primarily interested in the relationship between the risks of investments…
A: It is a true statement.
Q: 3. ND: Referring to the Z-Table, calculate the probability that each alternative will turn out at…
A: Find the Given details below: Given details: Alternatives States of Nature Recession…
Q: [16] In the case of dynamic limit pricing, an incumbent gradually raises price over time in an…
A: Since you have asked multiple questions we will provide the you the answer for the first 2 questions…
Q: Explain how economic growth affects the valuation of a stock. How are the interest rate, the…
A: "Since you have asked multiple questions we will solve the first question for you. If you want any…
Q: Consider the following game of ’divide the dollar.’ There is a dollar to be split between two…
A: We’ll answer the first question since the exact one wasn’t specified. Please submit a new question…
Q: Suppose savers either buy bonds or make deposits in savings accounts at banks. Initially, the…
A: A budget deficit is a situation when the country’s expenditure increased from its revenue.
Q: If a business has $1,000 Cash currently, $300 Revenue each month going forward, and negative $200…
A: Given cash = $1000 revenue = $300 negative = $200 profit
Q: 2. An analyst determines the intrinsic value of a stock to be equal to 255 lei. If the stock's…
A: The correct option is A) Overvalued Overview: To estimate a portfolio' intrinsic worth, portfolio…
Q: The following statements concern the competitive market equilibrium. Wh C. following is true? The…
A: Perfect competetion is a type of market wherein there is free entry and exit for the marketers which…
Q: A trust officer at the Blacksburg National Bank needs to determine how to invest $150,000 in the…
A: Let the amount invested in Bond A be Xa, Bond B be Xb, Bond C be Xc, Bond D be Xd, and Bond E be Xe…
Q: You own a coffee shop in a metro Toronto shopping mall. It is Friday evening and you are trying to…
A: We have to find the value of payoff for quality baked(Q)+demand(D) by using below formula
Q: You are also given the following table of average returns over the last 50 years: Stocks T-Bonds…
A: (a) Utilizing the historical methodology, the estimate to calculate risk premium for Steel Products…
Q: A MANUFACTURING FIRM WISHES TO GIVE EACH 80 EMPLOYEES A HOLIDAY BONUS. HOW MUCH IS NEEDED TO INVEST…
A: The manufacturing firm needed P12,615.80 to invest monthly for a year at 12% nominal interest rate…
Q: After a cursory examination of the put option prices, Torelli suspects that a good strategy is to…
A: Given the details of GMS Stock Hedging, the details of stock price and their probability and it is…
Q: An investment advisor at Shore Financial Services wants to develop a model that can be used to…
A: Since we only answer up to 3 sub-parts, we’ll answer the first 3. Please resubmit the question and…
Q: According to the CAPM, what is the expected risk premium of a stock with a beta of 0.8 if the market…
A: The Capital Asset Pricing Model is used to determine the expected return of security with the help…
Q: I own a single share of Wivco stock. I must sell myshare at the beginning of one of the next 30…
A:
Q: A person wants to invest in one of three alternative investment plans: stocks, bonds or a savings…
A: Following is the given information:
Q: 2. A daily demand for loaves of bread at a grocery store is given by the fllowing probability…
A: Given data is
Q: A local finance company quotes a 16 percent interest rate on one-year loans. So, if you borrow…
A: The timeline is: To find the APR and EAR, we need to use the actual cash flows of the loan. In…
Q: Write an equation giving profit as a function of the number of lightweight compasses produced. (ii)…
A: (i) p=30-3q
Q: We are considering investing in three stocks. The randomvariable Si represents the value one year…
A:
Q: A trust officer at the Blacksburg National Bank needs to determine how to invest $100,000 in the…
A: Given data: Bond Annual Return Maturity Risk Tax-Free A 9.5% Long High Yes…
Q: A newspaper has 500,000 subscribers who pay $4 per month for the paper. It costs the company…
A: Given data : Newspaper has subscribers - Demand D = 500,000 Ordering cost to bill the customers K…
Q: #17 FAVORABLE UNFAVORABLE MARKET MARKET EQUIPMENT ( $)…
A: “Since you have asked multiple question, we will solve the first question for you. If you want any…
Q: Consider a consumer that lives only for two periods. He works in period 1 (and gets income Y1) and…
A: We can say that where current consumption is solely dependent on current income, according to…
Q: Let Xi be the price (in dollars) of stock i one year fromnow. X1 is N(15, 100) and X2 is N(20,…
A: Let Xi be the price of stock i year from now. For all i = 1,2 As per the given information, X1 and…
Q: Stocks with high market betas have higher expected returns than stocks with low market betas. This…
A: Stock market are very unpredictable and prices change with every second.
Q: Pete is considering placing a bet on the NCAA playoffgame between Indiana and Purdue. Without any…
A: The calculation for EVSI is:
Q: Based on your understanding of portfolio risk, identify whether each statement is true or false.…
A: Correct answer is true Explanation: As with the diversification, we could be able to lower or reduce…
Q: Suppose that Pizza King and Noble Greek stopadvertising but must determine the price they will…
A: Let us first find all the possible actions available to Pizza King in this case: 1) Pizza King sell…
Q: Which of the following statement is true? For any type of derivatives, the payoffs will never be…
A: The true statement is :
Q: You are thinking of starting Peaco, which will produce Peakbabies, a product that competes with Ty’s…
A:
Q: Taxes The function T(x) represents the tax bill T of a single person whose adjusted gross income is…
A: Since you have posted a question with multiple sub-parts, we will solve first three sub-parts for…
Q: each company sinks wells of the same size at the same time. If both companies sink wide wells, each…
A: 1. This can be illustrated in a game-theoretic environment in a normal form game with the…
Q: You are thinking of starting Peaco, which will produce Peakbabies, a product that competes with Ty's…
A:
Q: Suppose an investor has the opportunity to buy the followingcontract, a stock call option, on March…
A: The following decision tree shows the problem in the most illustrative manner. The optimal…
Q: Which of the following statements is correct for the Black-Scholes model? A) The price of an…
A: A Small Introduction about distribution The term "distribution" refers to the process of spreading…
Q: Stock in Company A sells for $89 a share and has a 3-year average annual return of $24 a share. The…
A: Let; a be the number of shares in company A b be the number of shares in company B
Q: A salesperson for Fuller Brush has three options: quit,put forth a low-effort level, or put forth a…
A:
Q: The daily demand for a product in a shop can assume one of the following values: 100, 120, or 130…
A: The optimal stock assigns the specific measure of stock a business needs to satisfy routine interest…
Q: How long will it take $12,000 to grow to $19,000 if the investment earns interest at the rate of…
A: WE WOULD USE THE FORMULA OF COMPOUND INTEREST HERE. IT IS THE INTEREST WHIC IS ADDED OVER PRINCIPAL…
Q: You own Amazon stock. Suppose that Amazon has an expected return of 52% and a volatility of 19%. The…
A: SD(RxCML) = xSD(RMkt).23 = x(.16) → x = .23/.16 = 1.4375, so long 144% market and short 44%…
the price of a stock on July 1 is $30. A trader buys 100 call options on the stock with a strike price of $34 when the option price is $2. The options are exercised when the stock price is $40. The trader's net profit is ?
Step by step
Solved in 2 steps with 2 images
- A European put option allows an investor to sell a share of stock at the exercise price on the exercise data. For example, if the exercise price is 48, and the stock price is 45 on the exercise date, the investor can sell the stock for 48 and then immediately buy it back (that is, cover his position) for 45, making 3 profit. But if the stock price on the exercise date is greater than the exercise price, the option is worthless at that date. So for a put, the investor is hoping that the price of the stock decreases. Using the same parameters as in Example 11.7, find a fair price for a European put option. (Note: As discussed in the text, an actual put option is usually for 100 shares.)Suppose you currently have a portfolio of three stocks, A, B, and C. You own 500 shares of A, 300 of B, and 1000 of C. The current share prices are 42.76, 81.33, and, 58.22, respectively. You plan to hold this portfolio for at least a year. During the coming year, economists have predicted that the national economy will be awful, stable, or great with probabilities 0.2, 0.5, and 0.3. Given the state of the economy, the returns (one-year percentage changes) of the three stocks are independent and normally distributed. However, the means and standard deviations of these returns depend on the state of the economy, as indicated in the file P11_23.xlsx. a. Use @RISK to simulate the value of the portfolio and the portfolio return in the next year. How likely is it that you will have a negative return? How likely is it that you will have a return of at least 25%? b. Suppose you had a crystal ball where you could predict the state of the economy with certainty. The stock returns would still be uncertain, but you would know whether your means and standard deviations come from row 6, 7, or 8 of the P11_23.xlsx file. If you learn, with certainty, that the economy is going to be great in the next year, run the appropriate simulation to answer the same questions as in part a. Repeat this if you learn that the economy is going to be awful. How do these results compare with those in part a?You are considering a 10-year investment project. At present, the expected cash flow each year is 10,000. Suppose, however, that each years cash flow is normally distributed with mean equal to last years actual cash flow and standard deviation 1000. For example, suppose that the actual cash flow in year 1 is 12,000. Then year 2 cash flow is normal with mean 12,000 and standard deviation 1000. Also, at the end of year 1, your best guess is that each later years expected cash flow will be 12,000. a. Estimate the mean and standard deviation of the NPV of this project. Assume that cash flows are discounted at a rate of 10% per year. b. Now assume that the project has an abandonment option. At the end of each year you can abandon the project for the value given in the file P11_60.xlsx. For example, suppose that year 1 cash flow is 4000. Then at the end of year 1, you expect cash flow for each remaining year to be 4000. This has an NPV of less than 62,000, so you should abandon the project and collect 62,000 at the end of year 1. Estimate the mean and standard deviation of the project with the abandonment option. How much would you pay for the abandonment option? (Hint: You can abandon a project at most once. So in year 5, for example, you abandon only if the sum of future expected NPVs is less than the year 5 abandonment value and the project has not yet been abandoned. Also, once you abandon the project, the actual cash flows for future years are zero. So in this case the future cash flows after abandonment should be zero in your model.)
- In the financial world, there are many types of complex instruments called derivatives that derive their value from the value of an underlying asset. Consider the following simple derivative. A stocks current price is 80 per share. You purchase a derivative whose value to you becomes known a month from now. Specifically, let P be the price of the stock in a month. If P is between 75 and 85, the derivative is worth nothing to you. If P is less than 75, the derivative results in a loss of 100(75-P) dollars to you. (The factor of 100 is because many derivatives involve 100 shares.) If P is greater than 85, the derivative results in a gain of 100(P-85) dollars to you. Assume that the distribution of the change in the stock price from now to a month from now is normally distributed with mean 1 and standard deviation 8. Let EMV be the expected gain/loss from this derivative. It is a weighted average of all the possible losses and gains, weighted by their likelihoods. (Of course, any loss should be expressed as a negative number. For example, a loss of 1500 should be expressed as -1500.) Unfortunately, this is a difficult probability calculation, but EMV can be estimated by an @RISK simulation. Perform this simulation with at least 1000 iterations. What is your best estimate of EMV?The IRR is the discount rate r that makes a project have an NPV of 0. You can find IRR in Excel with the built-in IRR function, using the syntax =IRR(range of cash flows). However, it can be tricky. In fact, if the IRR is not near 10%, this function might not find an answer, and you would get an error message. Then you must try the syntax =IRR(range of cash flows, guess), where guess" is your best guess for the IRR. It is best to try a range of guesses (say, 90% to 100%). Find the IRR of the project described in Problem 34. 34. Consider a project with the following cash flows: year 1, 400; year 2, 200; year 3, 600; year 4, 900; year 5, 1000; year 6, 250; year 7, 230. Assume a discount rate of 15% per year. a. Find the projects NPV if cash flows occur at the ends of the respective years. b. Find the projects NPV if cash flows occur at the beginnings of the respective years. c. Find the projects NPV if cash flows occur at the middles of the respective years.Suppose you begin year 1 with 5000. At the beginning of each year, you put half of your money under a mattress and invest the other half in Whitewater stock. During each year, there is a 40% chance that the Whitewater stock will double, and there is a 60% chance that you will lose half of your investment. To illustrate, if the stock doubles during the first year, you will have 3750 under the mattress and 3750 invested in Whitewater during year 2. You want to estimate your annual return over a 30-year period. If you end with F dollars, your annual return is (F/5000)1/30 1. For example, if you end with 100,000, your annual return is 201/30 1 = 0.105, or 10.5%. Run 1000 replications of an appropriate simulation. Based on the results, you can be 95% certain that your annual return will be between which two values?
- An automobile manufacturer is considering whether to introduce a new model called the Racer. The profitability of the Racer depends on the following factors: The fixed cost of developing the Racer is triangularly distributed with parameters 3, 4, and 5, all in billions. Year 1 sales are normally distributed with mean 200,000 and standard deviation 50,000. Year 2 sales are normally distributed with mean equal to actual year 1 sales and standard deviation 50,000. Year 3 sales are normally distributed with mean equal to actual year 2 sales and standard deviation 50,000. The selling price in year 1 is 25,000. The year 2 selling price will be 1.05[year 1 price + 50 (% diff1)] where % diff1 is the number of percentage points by which actual year 1 sales differ from expected year 1 sales. The 1.05 factor accounts for inflation. For example, if the year 1 sales figure is 180,000, which is 10 percentage points below the expected year 1 sales, then the year 2 price will be 1.05[25,000 + 50( 10)] = 25,725. Similarly, the year 3 price will be 1.05[year 2 price + 50(% diff2)] where % diff2 is the percentage by which actual year 2 sales differ from expected year 2 sales. The variable cost in year 1 is triangularly distributed with parameters 10,000, 12,000, and 15,000, and it is assumed to increase by 5% each year. Your goal is to estimate the NPV of the new car during its first three years. Assume that the company is able to produce exactly as many cars as it can sell. Also, assume that cash flows are discounted at 10%. Simulate 1000 trials to estimate the mean and standard deviation of the NPV for the first three years of sales. Also, determine an interval such that you are 95% certain that the NPV of the Racer during its first three years of operation will be within this interval.Amanda has 30 years to save for her retirement. At the beginning of each year, she puts 5000 into her retirement account. At any point in time, all of Amandas retirement funds are tied up in the stock market. Suppose the annual return on stocks follows a normal distribution with mean 12% and standard deviation 25%. What is the probability that at the end of 30 years, Amanda will have reached her goal of having 1,000,000 for retirement? Assume that if Amanda reaches her goal before 30 years, she will stop investing. (Hint: Each year you should keep track of Amandas beginning cash positionfor year 1, this is 5000and Amandas ending cash position. Of course, Amandas ending cash position for a given year is a function of her beginning cash position and the return on stocks for that year. To estimate the probability that Amanda meets her goal, use an IF statement that returns 1 if she meets her goal and 0 otherwise.)In Example 11.1, the possible profits vary from negative to positive for each of the 10 possible bids examined. a. For each of these, use @RISKs RISKTARGET function to find the probability that Millers profit is positive. Do you believe these results should have any bearing on Millers choice of bid? b. Use @RISKs RISKPERCENTILE function to find the 10th percentile for each of these bids. Can you explain why the percentiles have the values you obtain?
- A company manufacturers a product in the United States and sells it in England. The unit cost of manufacturing is 50. The current exchange rate (dollars per pound) is 1.221. The demand function, which indicates how many units the company can sell in England as a function of price (in pounds) is of the power type, with constant 27556759 and exponent 2.4. a. Develop a model for the companys profit (in dollars) as a function of the price it charges (in pounds). Then use a data table to find the profit-maximizing price to the nearest pound. b. If the exchange rate varies from its current value, does the profit-maximizing price increase or decrease? Does the maximum profit increase or decrease?In August of the current year, a car dealer is trying to determine how many cars of the next model year to order. Each car ordered in August costs 20,000. The demand for the dealers next year models has the probability distribution shown in the file P10_12.xlsx. Each car sells for 25,000. If demand for next years cars exceeds the number of cars ordered in August, the dealer must reorder at a cost of 22,000 per car. Excess cars can be disposed of at 17,000 per car. Use simulation to determine how many cars to order in August. For your optimal order quantity, find a 95% confidence interval for the expected profit.A common decision is whether a company should buy equipment and produce a product in house or outsource production to another company. If sales volume is high enough, then by producing in house, the savings on unit costs will cover the fixed cost of the equipment. Suppose a company must make such a decision for a four-year time horizon, given the following data. Use simulation to estimate the probability that producing in house is better than outsourcing. If the company outsources production, it will have to purchase the product from the manufacturer for 25 per unit. This unit cost will remain constant for the next four years. The company will sell the product for 42 per unit. This price will remain constant for the next four years. If the company produces the product in house, it must buy a 500,000 machine that is depreciated on a straight-line basis over four years, and its cost of production will be 9 per unit. This unit cost will remain constant for the next four years. The demand in year 1 has a worst case of 10,000 units, a most likely case of 14,000 units, and a best case of 16,000 units. The average annual growth in demand for years 2-4 has a worst case of 7%, a most likely case of 15%, and a best case of 20%. Whatever this annual growth is, it will be the same in each of the years. The tax rate is 35%. Cash flows are discounted at 8% per year.