Fight Finance

Suppose that the US government recently announced that subsidies for fresh milk producers will be gradually phased out over the next year. Newspapers say that there are expectations of a 40% increase in the spot price of fresh milk over the next year.

Option prices on fresh milk trading on the Chicago Mercantile Exchange (CME) reflect expectations of this 40% increase in spot prices over the next year. Similarly to the rest of the market, you believe that prices will rise by 40% over the next year.

What option trades are likely to be profitable, or to be more specific, result in a positive Net Present Value (NPV)?

Assume that:

• Only the spot price is expected to increase and there is no change in expected volatility or other variables that affect option prices.
• No taxes, transaction costs, information asymmetry, bid-ask spreads or other market frictions.

In late 2003 the listed bank ANZ announced a 2-for-11 rights issue to fund the takeover of New Zealand bank NBNZ. Below is the chronology of events:

• 23/10/2003. Share price closes at $18.30.

• 24/10/2003. 2-for-11 rights issue announced at a subscription price of $13. The proceeds of the rights issue will be used to acquire New Zealand bank NBNZ. Trading halt announced in morning before market opens.

• 28/10/2003. Trading halt lifted. Last (and only) day that shares trade cum-rights. Share price opens at $18.00 and closes at $18.14.

• 29/10/2003. Shares trade ex-rights.

All things remaining equal, what would you expect ANZ's stock price to open at on the first day that it trades ex-rights (29/10/2003)? Ignore the time value of money since time is negligibly short. Also ignore taxes.

You want to buy a house priced at $400,000. You have saved a deposit of $40,000. The bank has agreed to lend you $360,000 as a fully amortising loan with a term of 30 years. The interest rate is 8% pa payable monthly and is not expected to change.

What will be your monthly payments?

An investor bought a 10 year 2.5% pa fixed coupon government bond priced at par. The face value is $100. Coupons are paid semi-annually and the next one is in 6 months.

Six months later, just after the coupon at that time was paid, yields suddenly and unexpectedly fell to 2% pa. Note that all yields above are given as APR's compounding semi-annually.

What was the bond investors' historical total return over that first 6 month period, given as an effective semi-annual rate?

Which of the following statements about standard statistical mathematics notation is NOT correct?

The Australian dollar's value was:

1.4875 USD per AUD on 31 August 1974.
0.4890 USD per AUD on 31 March 2001.

Did the Australian dollar or against the US dollar between these dates?

Which of the below formulas gives the payoff ##(f)## at maturity ##(T)## from being long a put option? Let the underlying asset price at maturity be ##S_T## and the exercise price be ##X_T##.

Mr Blue, Miss Red and Mrs Green are people with different utility functions.

Each person has $50 of initial wealth. A coin toss game is offered to each person at a casino where the player can win or lose $50. Each player can flip a coin and if they flip heads, they receive $50. If they flip tails then they will lose $50. Which of the following statements is NOT correct?

A share will pay its next dividend of ##C_1## in one year, and will continue to pay a dividend every year after that forever, growing at a rate of ##g##. So the next dividend will be ##C_2=C_1 (1+g)^1##, then ##C_3=C_2 (1+g)^1##, and so on forever.

The current price of the share is ##P_0## and its required return is ##r##

Which of the following is NOT equal to the expected share price in 2 years ##(P_2)## just after the dividend at that time ##(C_2)## has been paid?

Below is a table showing some countries’ GDP, population and GDP per capita.

Source: "GDP and its breakdown at current prices in US Dollars" United Nations Statistics Division. December 2016.

Using this data only, which one of these countries’ citizens have the highest living standards?