A company runs a number of slaughterhouses which supply hamburger meat to McDonalds. The company is afraid that live cattle prices will increase over the next year, even though there is widespread belief in the market that they will be stable. What can the company do to hedge against the risk of increasing live cattle prices? Which statement(s) are correct?
(i) buy call options on live cattle.
(ii) buy put options on live cattle.
(iii) sell call options on live cattle.
Select the most correct response:
A stock pays annual dividends. It just paid a dividend of $5. The growth rate in the dividend is 1% pa. You estimate that the stock's required return is 8% pa. Both the discount rate and growth rate are given as effective annual rates.
Using the dividend discount model, what will be the share price?
You just bought $100,000 worth of inventory from a wholesale supplier. You are given the option of paying within 5 days and receiving a 2% discount, or paying the full price within 60 days.
You actually don't have the cash to pay within 5 days, but you could borrow it from the bank (as an overdraft) at 10% pa, given as an effective annual rate.
In 60 days you will have enough money to pay the full cost without having to borrow from the bank.
What is the implicit interest rate charged by the wholesale supplier, given as an effective annual rate? Also, should you borrow from the bank in 5 days to pay the supplier and receive the discount? Or just pay the full price on the last possible date?
Assume that there are 365 days per year.
The below screenshot of Commonwealth Bank of Australia's (CBA) details were taken from the Google Finance website on 7 Nov 2014. Some information has been deliberately blanked out.
What was CBA's market capitalisation of equity?
The covariance and correlation of two stocks X and Y's annual returns are calculated over a number of years. The units of the returns are in percent per annum ##(\% pa)##.
What are the units of the covariance ##(\sigma_{X,Y})## and correlation ##(\rho_{X,Y})## of returns respectively?
Hint: Visit Wikipedia to understand the difference between percentage points ##(\text{pp})## and percent ##(\%)##.
What is the covariance of a variable X with itself?
The cov(X, X) or ##\sigma_{X,X}## equals:
A stock's required total return will increase when its:
Which of the following is NOT a valid method for estimating the beta of a company's stock? Assume that markets are efficient, a long history of past data is available, the stock possesses idiosyncratic and market risk. The variances and standard deviations below denote total risks.