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- 1. Consider a wine dealer who has k bottles of wine. The dealer can sell them now (t = 0) or can store it for some time and then sell them later. The value of k bottles at t-th month is given by: Vt = ket The dealer can use the sales revenue as principal in a risk-free investment at rate r. (d) If the risk free rate is 5%, what is the optimal timing of sales?Suppose that a new machine tool having a usetul ife of onty one year costs $80.000 Suppose, atso, that the net additional revenue resulting thom buying this tool isexpected to be $12.000. The expected rote of return on this tool is Multiple Choice 40 percent 60 percent 30 percent 12 percentThe demand D (in billions of £) for a bond with coupon rate 5% and face value FV = 1000, andtwo years to maturity as a function of its price P is D = 4000 − 2P. The supply in (billions of£) as a function of the price of the bond is S = 2P + 400. b) Suppose that the yield to maturity of the bond is i = 0.05. What is the quantitydemanded/supplied at this interest rate? What happens to the demand/supply of the bond asthe interest rate increases? Explain why. c) What is the equilibrium interest rate? d) Suppose that the bond trades at premium. Is there excess demand or supply? Explain.e) There is a business cycle expansion, so both supply and demand shifts. After the shift, thenew demand curve is given by: D = 4000 + X − 2P, whereas the new supply curve is S =2P + 200. For which values of X will the interest increase/decrease? Which values of X arein line with empirical data?
- The demand D (in billions of £) for a bond with coupon rate 5% and face value FV = 1000, andtwo years to maturity as a function of its price P is D = 4000 − 2P. The supply in (billions of£) as a function of the price of the bond is S = 2P + 400. b) Suppose that the yield to maturity of the bond is i = 0.05. What is the quantitydemanded/supplied at this interest rate? What happens to the demand/supply of the bond asthe interest rate increases? Explain why. c) What is the equilibrium interest rate?Person A, Person B and Person C own stock in the same company. All of them are loss averse and have the same value function: v(x) = x/2 for gains and v(x) = 2x for losses. The stock's price is shown in the graph below Stock Price 100 90 80 95 80 90 70 70 60 60 50 50 40 30 20 10 0 October November December January Feburary March (a) (b) O Person A bought the stock in November and uses the purchase price as their reference point. If you ask them, how much would they say that they lost in terms of value when the price dropped from £95 to £70? Person B bought the stock in October and uses the peak price as their reference point. If you ask them, how much would they say that they lost in terms of value in January? In January, which month should Person B rather use as reference point in order to maximize their value? (d) [ Person C bought the stock in March. They expect to derive a value of at least +5 in April as compared to their reference point of the purchase price. What is the minimum…Suppose XYZ Corporation's stock price rises or falls with equal probability by $25 each month, starting where it ended the previous month. What is the value of a three month at the-money European call option on XYZ's stock if the stock is priced at $100 when the option is purchased?$______
- In a financial market a stock is traded with a current price of 50. Next period the price of the stock can either go up with 30 per cent or go down with 25 per cent. Risk-free debt is available with an interest rate of 8 per cent. Also traded are European options on the stock with an exercise price of 45 and a time to maturity of 1, i.e. they mature next period. Find prices of Arrow-Debreu securities.9 A program, if implemented, will operate for 10 years for certain. Your best guess is that after year 10 and following each year thereafter there will be a 0.02 probability the program will end. Real net benefits are $25 the first year and are expected to grow 1% per year as long as the program is in operation. Benefits accrue at the end of the year. The real discount rate is 3.5%. What is the NPV of the horizon value of net benefits following year 10, as seen from time 0, the beginning of the first year33 TB MC Qu. 12-82 A stock had annual returns of... A stock had annual returns of 5.5 percent, -12 percent, and 15.5 percent for the past thr of returns for this stock? 56.65% 6.94% 1.94%
- A stock price is currently $100 and at the end of four months it will be ST . A derivative written on this stock pays off expST1/3 in four months. Given that u = 1.15, d = 0.87, and that the risk-free interest rate is 10% p.a. (continuously compounded), answer the following questions using a one-period binomial model (show all the details of your calculations and display the results with four decimal places): Calculate the value of ∆ Calculate the current value of the derivative.Submit All Question 28 of 30 Suppose Jon decides to purchase either a long-term Treasury bond or a share of stock from a company in the Dow Jones Industrial Average. Assume that either one will behave similarly to the average security in their class, and ignore the effect of market conditions. Which security is more likely to lose most of its value in the next year after Jon purchases it? O the probabilities of major loss are the same they are both guaranteed to increase in value the stock the bond Based on historical returns, which security is likely to grow more significantly in value after Jon purchases it? the bond 8:27 PM a 46°F E 4) 12/15/202A firm is considering purchasing equipment to manufacture a new product. The equipment will cost $3M, and expected net cash inflowsare $0.35M indefinitely. If market demand for theproduct is low, then over the next five years thefirm will have the option of discarding the equipment on a secondary market for $2.2M. Assume thatMARR = 12%, s = 50%, and r = 6%. What isthe value of this investment opportunity for the firm?