Corporate Finance (4th Edition) (Pearson Series in Finance) - Standalone book
4th Edition
ISBN: 9780134083278
Author: Jonathan Berk, Peter DeMarzo
Publisher: PEARSON
expand_more
expand_more
format_list_bulleted
Question
Chapter 3.A, Problem A.3P
a)
Summary Introduction
To determine: The price of a security.
b)
Summary Introduction
To discuss: Whether the answer from part (a) changes if the security pays $1000 for the last odd or zero numbers of DJ.
c)
Summary Introduction
To discuss: Whether trading both the securities in market today affects the above answer in part (a).
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
You happen to be checking the newspaper and notice an arbitrage opportunity.The current stock price of Gougou is $20 per share and the one-year risk-free interestrate is 8%. A one-year put on Gougou with a strike price of $18 sells for $3.33, whilethe identical call sells for $7. Explain what you must do to exploit this arbitrageopportunity
Suppose you owned a portfolio consisting of $250,000 of long-term U.S. government bonds.a. Would your portfolio be riskless? Explain.b. Now suppose the portfolio consists of $250,000 of 30-day Treasury bills. Every 30 daysyour bills mature, and you will reinvest the principal ($250,000) in a new batch ofbills. You plan to live on the investment income from your portfolio, and you want tomaintain a constant standard of living. Is the T-bill portfolio truly riskless? Explain.c. What is the least risky security you can think of? Explain.
Suppose an investor buys 300 stocks for 3 months, the stock price is 10 yuan, and the annual interest rate for 3 months is fixed at 5%. How can I use forward contracts to avoid risks? What is the execution price? Please analyze if the stock price rises to 15 yuan or falls to 8 yuan after 3 months of hedging, what are the losses of this investor?
Chapter 3 Solutions
Corporate Finance (4th Edition) (Pearson Series in Finance) - Standalone book
Ch. 3.1 - Prob. 1CCCh. 3.1 - If crude oil trades in a competitive market, would...Ch. 3.2 - How do you compare costs at different points in...Ch. 3.2 - Prob. 2CCCh. 3.3 - What is the NPV decision rule?Ch. 3.3 - Why doesnt the NPV decision rule depend on the...Ch. 3.4 - Prob. 1CCCh. 3.4 - Prob. 2CCCh. 3.5 - If a firm makes an investment that has a positive...Ch. 3.5 - Prob. 2CC
Ch. 3.5 - Prob. 3CCCh. 3.A - The table here shows the no-arbitrage prices of...Ch. 3.A - Suppose security Chas a payoff of 600 when the...Ch. 3.A - Prob. A.3PCh. 3.A - Prob. A.4PCh. 3.A - Prob. A.5PCh. 3.A - Consider a portfolio of two securities: one share...Ch. 3.A2 - Why does the expected return of a risky security...Ch. 3.A2 - Prob. 2CCCh. 3.A3 - Prob. 1CCCh. 3.A3 - Prob. 2CCCh. 3 - Honda Motor Company is considering offering a 2000...Ch. 3 - You are an international shrimp trader. A food...Ch. 3 - Prob. 3PCh. 3 - Prob. 4PCh. 3 - You have decided to take your daughter skiing in...Ch. 3 - Suppose the risk-free interest rate is 4%. a....Ch. 3 - You have an investment opportunity in Japan. It...Ch. 3 - Your firm has a risk-free investment opportunity...Ch. 3 - You run a construction firm. You have just won a...Ch. 3 - Your firm has identified three potential...Ch. 3 - Your computer manufacturing firm must purchase...Ch. 3 - Prob. 12PCh. 3 - Prob. 13PCh. 3 - An American Depositary Receipt (ADR) is security...Ch. 3 - Prob. 15PCh. 3 - An Exchange-Traded Fund (ETF) is a security that...Ch. 3 - Consider two securities that pay risk-free cash...Ch. 3 - Prob. 18P
Knowledge Booster
Similar questions
- Suppose you have $375,000 in cash, and you decide to borrow another $63,750 at a 7% interest rate to invest in the stock market. You invest the entire $438,750 in a portfolio J with a 20% expected return and a 28% volatility. a. What is the expected return and volatility (standard deviation) of your investment? b. What is your realized return if J goes up 39% over the year? c. What return do you realize if J falls by 19% over the year?arrow_forwardSuppose an investor sells 100 stocks by short selling for 6 months, the stock price is 30 yuan, and the annual interest rate of 6 months is fixed at 3%. How can I use forward contracts to avoid risks? What is the execution price? Please analyze if the stock price rises to 35 yuan or falls to 25 yuan after 6 months of hedging, what are the losses of this investor?arrow_forwardABC Co. has a large amount of variable rate financing due in one year. The management is concerned about the possibility of increases in short-term rates. Which would be an effective way of hedging this risk?a. Buy Treasury notes in the futures market.b. Sell Treasury notes in the futures market.c. Buy an option to purchase Treasury bonds.d. Sell an option to purchase Treasury bondsarrow_forward
- Suppose that one year ago, you invested in a stock market portfolio, which is currently worth £62,000. You are convinced the portfolio is well-diversified and fitted to your profile as an investor, and the beta of your portfolic is 0.9. You are planning to hold this portfolio for at least another three years. Suppose that the current level of FTSE100 is 1850, and the risk - free interest rate is 1.5% a) Iderdify any relevant risk that you may be facing in reference to your investment portfolio. b) Suppose there is a two year FTSE100 futures contract available. The futures price is 1855, and one contract is for £10 times the index: How many contracts would you need to eliminate the exposure to the market over the next two years? What position in these contracts would you take today? c) Evaluate the out comes of your hedging strategy if FTSE100 in two years'time is 1842. Comment on your results.arrow_forwardYou are an assistant analyst at a financial consulting company. You havebeen asked to prepare a report for your manager who is advising a newclient on using interest rate derivatives to hedge against interest ratemovements.The client is hoping to increase production capacity by 50% in the next twoto three years due to increasing demand for its products. The client will needto obtain finance to fund the expansion.The yield curve is currently upward sloping; however, the client is worriedthat possible Federal Reserve actions to reduce inflation may result in adownturn in the economy. As the client already has floating interest-baseddebt, it is enquiring about hedging potential interest rate risk using swaps.You are required to write a short report that addresses the followingconcerns so that your manager can present it to the client:a) In what ways could the client use swaps to reduce exposure tointerest rate movements on its cost of debt? Include an explanationof any disadvantages of…arrow_forwardWhat is the present value of a security that will pay $10,000 in 20 years if securities of equal risk pay 10% annually? Do not round intermediate calculations. Round your answer to the nearest cent.arrow_forward
- Next year the economy will be in an expansion, normal, or recession state with probabilities 0.46, 0.39, and 0.15, respectively. The returns (%) on the securities in these states are as follows. Security 1 {+9.30, +9.30, +7.80}; Security 2{+15.60, +7.50, +2.20}; Security 3 {expansion = +13.57, normal = +9.20, recession = +4.60}. Your client will invest in one of these portfolios only. Which security can you rule out, that is, you will not advise your risk-averse client to invest in it?arrow_forwardBased in the U.S., Your firm faces a 25% chance of a potential loss of $20 million next year. If yourfirm implements new policies, it can reduce the chance of this loss by 10%, but these new policieshave an upfront cost of $300,000. Suppose the beta of the loss is 0, and the risk-free interest rate5%.ISa) If the firm is uninsured, what is the NPV of implementing the new policies?b) If the firm is fully insured, what is the NPV of implementing the new policies?c) Given your answer to question b), what is the actuarially fair cost of full insurance?d) What is the minimum-size deductible that would leave your firm with an incentive toimplement the new policies?e) What is the actuarially fair price of an insurance policy with the deductible in question darrow_forwardYou are bullish on GCB stock. The current market price is GHS5.00 per share, and you have GHS5,000 of your own to invest. You borrow an additional GHS5,000 from your broker at an interest rate of 12% per year and invest the GHS10,000 in the stock. a.What will be your rate of return if the price of GCB stock goes up by 20% during the next year? b.How far does the stock of GCB stock have to fall for you to get a margin call if the maintenance margin is 30%.arrow_forward
- Suppose it is Jan 1st, and the futures price for August 1st delivery of a 1-year zero-coupon government T-bill is $96/$100FV. The size of one contract is for $1M face value If your bank goes long 20 contracts, is this a bet that interest rates are going to increase, or decrease? (type ‘increase’ or ‘decrease’) If your bank goes long 20 contracts, and the price of the August 1st future increases to $97, how much money is the bank up in this contract? The current $-Duration of a bank’s assets minus liabilities is 200M. If interest rates rise and the interest rate factor on all securities increases by 3%, how does the banks book value of equity change (in millions)? (note: a change which is a decrease would be a negative change)arrow_forwardThe market price of a security is $100 and the expected return is 15%. The risk-free rate is 7% and the market risk premium is 10%. The firm pays a dividend every year. What is the percentage change of the market price today if the correlation of the security return with the market portfolio return doubles?arrow_forwardSuppose you are thinking of purchasing the stock of Moore Oil, Inc. and you expect it to pay a $2 dividend in one year and you believe that you can sell the stock for $14 at that time. If you require a return of 20% on investments of this risk, what is the maximum you would be willing to pay?arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
Essentials Of InvestmentsFinanceISBN:9781260013924Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.Publisher:Mcgraw-hill Education,
Foundations Of FinanceFinanceISBN:9780134897264Author:KEOWN, Arthur J., Martin, John D., PETTY, J. WilliamPublisher:Pearson,
Fundamentals of Financial Management (MindTap Cou...FinanceISBN:9781337395250Author:Eugene F. Brigham, Joel F. HoustonPublisher:Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i...FinanceISBN:9780077861759Author:Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan ProfessorPublisher:McGraw-Hill Education
Essentials Of Investments
Finance
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:9780134897264
Author:KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:Pearson,
Fundamentals of Financial Management (MindTap Cou...
Finance
ISBN:9781337395250
Author:Eugene F. Brigham, Joel F. Houston
Publisher:Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i...
Finance
ISBN:9780077861759
Author:Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:McGraw-Hill Education