Concept explainers
Joe Finance has just purchased a stock-index fund, currently selling at
a. Analyze Joe’s; and Sally’s strategies by drawing the profit diagrams for the stock-plus-put positions for various values of the Stock fund in three months.
b. When does Sally’s strategy do better? When does it do worse?
c. Which strategy entails greater systematic risk?
Want to see the full answer?
Check out a sample textbook solutionChapter 15 Solutions
Essentials Of Investments
- 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?arrow_forwardRebecca is interested in purchasing an European call on a hot new stock, Up, Inc. The call has a strike price of $100 and expires in 90 days . The current price of Up stock is $120, and the stock has a standard deviation of 40% per year. The risk-free interest rate is 6.18% per year. a). Using the Black - Scholes formula , compute the price of the call b). Use put-call parity to compute the price of the put with the same strike and expiration datearrow_forwardAn investor holds 700,000 shares in Didi & Co. and is considering buying some put options to hedge her investment. Didi & Co.’s current share price is RM 6.00. The risk free interest rate is currently 12% pa and the recent volatility of Didi & Co. shares has been 30% per annum. She requires European put options with an exercise price RM5.00 for exercise in two years’ time. a) Calculate the value that the bank is likely to charge for 700,000 put options of the investor’s required specification. b) A friend informs the investors that she could achieve a safer position by selling call options to construct a delta hedge. Calculate the number of call option to be sold to construct a delta hedge. Give typing answer with explanation and conclusionarrow_forward
- Rebecca is interested in purchasing a European call on a hot new stock, Up, Inc. The call has a strike price of $100 and expires in 90 days. The current price of Up stock is $120, and the stock has a standard deviation of 40% per year. The risk-free interest rate is 6.18% per year. Using the Black-Scholes formula, compute the price of the call.arrow_forwardMr. Norman and Mr. Foster are both investors looking to buy financial assets. Mr. Norman prefers assets with the lowest prices while Mr. Foster prefers assets on the financial market with higher prices. Each of them currently has GHC 1,000 to invest and needs your assistance to know which asset to buy to suit their preference. The following information provides details of investment options. a. Asset A is a bond with a coupon rate of 10% and pays semi-annual coupons. The par value is GHC 1,000, and the bond has 5 years to maturity. The yield to maturity is 11%. b. Asset B is a stock whose dividend is expected to increase by 20% in one year and by 15% in two years. After that, dividends will increase at a rate of 5% per year indefinitely. The last dividend was GHC 100 and the required return is 20%. Which asset will Mr. Norman and Mr. Foster invest in?arrow_forwardYou are the investment manager for Global Assets Investments Company's mutual fund and you have US$690,000,000.00 to invest in Fidelity Co. ltd, a stock selling for US$46 per share. The initial margin requirement is 60%, and the maintenance margin is 40%. Show in detail the impact on your rate of return if the stock rises to US$57 per share and if it declines to US$19 per share assuming: (i) you pay cash for the stock (ii) you buy it using maximum leverage (B) Based on further market analysis you believe that the stock price of another company, Tower Equity Co. Ltd, may rise shortly and you have US$470,000 to open a second margin account to purchase Tower Equity's shares at US$23.50 per share. Assuming the initial margin requirement is 55%; (i) how many shares can you purchase using maximum allowable margin (ii) if the maintenance margin is 35% to what price can Tower Equity Co. Ltd stock fall before you receive a margin call (iii) one month later the stock falls to US$8 per share and…arrow_forward
- Mr. Norman and Mr. Foster are both investors looking to buy financial assets. Mr. Norman prefers assets with the lowest prices while Mr. Foster prefers assets on the financial market with higher prices. Each of them currently has GHC 1,000 to invest and needs your assistance to know which asset to buy to suit their preference. The following information provides details of investment options. a. Asset A is a bond with a coupon rate of 10% and pays semi- annual coupons. The par value is GHC 1,000, and the bond has 5 years to maturity. The yield to maturity is 11%. b. Asset B is a stock whose dividend is expected to increase by 20% in one year and by 15% in two years. After that, dividends will increase at a rate of 5% per year indefinitely. The last dividend was GHC 100 and the required return is 20%. Which asset will Mr. Norman and Mr. Foster invest in? In the 2020 accounting year, investors made a number observations in terms of certain decisions some corporations were taking: (1) The…arrow_forwardSam wants to trade options and is looking at some on Honeywell's stock. Specifically, he sees a European call on Honeywell with a strike price of $100.00 that expires in 87 days. Honeywell's current stock price is $121.43, and it has a standard deviation of 42% per year. The risk-free interest rate is 6.03% per year. They pay no dividends. However, he is interested in buying a put not a call. Estimate the value of a put with the same strike price and expiration date as the call just described. Use a 365-day year. (You must show me how you do this without an Excel-based option pricing model. That is, you must show your work with the formulas and Z-Tables. The value will likely be different than if you just plug into an Excel-based BSOPM). The price of the put is $ (Round to two decimal places.)arrow_forwardElise Carlo is adapting the cost averaging in investment. She decided to invest in a mutual fund for 6 months with a monthly investment of P4,500.00. The initial shares price of the fund was listed at P200 then decreases by 5% every month for a year. Compute for the average price using cost-averaging method.arrow_forward
- Suppose that PIMCO buys $100m worth of 1-year par-valued Treasuries with a 2.5% coupon rate. Then, the fund immediately enters into an overnight repurchase agreement (repo) with a money-market fund at a 2.0% repo rate with a 1.0% haircut. What is the $duration of PIMCO's overnight repo position? (units: millions of dollars; do not include the "$" sign)arrow_forwardHere's an excerpt from an interview between Magellan fund co-founder Hamish Douglass and AFR reporter Vesna Poljak, which appeared in the Australian Financial Review article ‘It's all about interest rates: Hamish Douglass’, 19 July 2019: Take a business growing at 4 per cent a year, with a cost of equity of 10 per cent based off a 5 per cent risk-free rate and a 5 per cent market risk premium: you would value that at around 16.6 times free cashflow. Now take a business growing at the same rate, with a 4 per cent risk free rate. At a 9 per cent cost of equity that would command a 20 times multiple, he says. At a 3 per cent risk-free rate, the cost of equity is 8 per cent, and the multiple is 25. Finally at 2 per cent – 'which is where the world is at the moment' – the same business would be worth around 33 times free cashflow. The 'multiples' that Hamish Douglass refers to could also be called: Select one: a. Annuity factors (=1/r*(1-1/(1+r)^T)). b. Perpetuity factors (=1/(r-g)). c.…arrow_forwardSuppose Majtrk has a front-end load fee of 9%. If you purchase 100 shares of this fund at the NAV, you will pay a commission of S in one month, you sell the shares, you pay a redemption fee at that time. If you are interested only in funds without any fee, you the quotations as listed in the table, it is 11, to use additional online resources to find no-load funds, because using only to determine the amount of any front-end load fee that the fund may charge.arrow_forward
- 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 LearningCorporate 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