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Question 125  option, speculation, market efficiency

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.



Question 325  foreign exchange rate

In the 1997 Asian financial crisis many countries' exchange rates depreciated rapidly against the US dollar (USD). The Thai, Indonesian, Malaysian, Korean and Filipino currencies were severely affected. The below graph shows these Asian countries' currencies in USD per one unit of their currency, indexed to 100 in June 1997.

Image of Asian currencies in the 1997 Asian financial crisis, sourced from the RBA

Of the statements below, which is NOT correct? The Asian countries':



Question 456  inflation, effective rate

In the 'Austin Powers' series of movies, the character Dr. Evil threatens to destroy the world unless the United Nations pays him a ransom (video 1, video 2). Dr. Evil makes the threat on two separate occasions:

  • In 1969 he demands a ransom of $1 million (=10^6), and again;
  • In 1997 he demands a ransom of $100 billion (=10^11).

If Dr. Evil's demands are equivalent in real terms, in other words $1 million will buy the same basket of goods in 1969 as $100 billion would in 1997, what was the implied inflation rate over the 28 years from 1969 to 1997?

The answer choices below are given as effective annual rates:


Question 520  NPV, DDM

The following cash flows are expected:

  • Constant perpetual yearly payments of $70, with the first payment in 2.5 years from now (first payment at t=2.5).
  • A single payment of $600 in 3 years and 9 months (t=3.75) from now.

What is the NPV of the cash flows if the discount rate is 10% given as an effective annual rate?



Question 575  inflation, real and nominal returns and cash flows

You expect a nominal payment of $100 in 5 years. The real discount rate is 10% pa and the inflation rate is 3% pa. Which of the following statements is NOT correct?



Question 614  debt terminology

You buy a house funded using a home loan. Have you or debt?


Question 726  return distribution, mean and median returns

If a stock's expected future prices are log-normally distributed, what will be bigger, the stock's or future price? Or would you expect them to be ?


Question 751  NPV, Annuity

Telsa Motors advertises that its Model S electric car saves $570 per month in fuel costs. Assume that Tesla cars last for 10 years, fuel and electricity costs remain the same, and savings are made at the end of each month with the first saving of $570 in one month from now.

The effective annual interest rate is 15.8%, and the effective monthly interest rate is 1.23%. What is the present value of the savings?



Question 814  expected and historical returns

If future required returns rise, and future expected cash flows remain the same, then prices will , or remain the ?


Question 848  monetary policy, no explanation

Which of the following is NOT the Australian central bank’s responsibility?