A wholesale shop offers credit to its customers. The customers are given 21 days to pay for their goods. But if they pay straight away (now) they get a 1% discount.
What is the effective interest rate given to customers who pay in 21 days? All rates given below are effective annual rates. Assume 365 days in a year.
Question 386 Merton model of corporate debt, real option, option
A risky firm will last for one period only (t=0 to 1), then it will be liquidated. So it's assets will be sold and the debt holders and equity holders will be paid out in that order. The firm has the following quantities:
##V## = Market value of assets.
##E## = Market value of (levered) equity.
##D## = Market value of zero coupon bonds.
##F_1## = Total face value of zero coupon bonds which is promised to be paid in one year.
The risky corporate debt graph above contains bold labels a to e. Which of the following statements about those labels is NOT correct?
The below screenshot of Microsoft's (MSFT) details were taken from the Google Finance website on 28 Nov 2014. Some information has been deliberately blanked out.
What was MSFT's approximate payout ratio over the last year?
Note that MSFT's past four quarterly dividends were $0.31, $0.28, $0.28 and $0.28.
The price of gold is currently $700 per ounce. The forward price for delivery in 1 year is $800. An arbitrageur can borrow money at 10% per annum given as an effective discrete annual rate. Assume that gold is fairly priced and the cost of storing gold is zero.
What is the best way to conduct an arbitrage in this situation? The best arbitrage strategy requires zero capital, has zero risk and makes money straight away. An arbitrageur should sell 1 forward on gold and:
A Chinese man wishes to convert AUD 1 million into Chinese Renminbi (RMB, also called the Yuan (CNY)). The exchange rate is 6.35 RMB per USD, and 0.72 USD per AUD. How much is the AUD 1 million worth in RMB?
Which of the below formulas gives the payoff at maturity ##(f_T)## from being long a future? Let the underlying asset price at maturity be ##S_T## and the locked-in futures price be ##K_T##.
An equity index stands at 100 points and the one year equity futures price is 107.
The equity index is expected to have a dividend yield of 3% pa. Assume that investors are risk-neutral so their total required return on the shares is the same as the risk free Treasury bond yield which is 10% pa. Both are given as discrete effective annual rates.
Assuming that the equity index is fairly priced, an arbitrageur would recognise that the equity futures are:
Question 797 option, Black-Scholes-Merton option pricing, option delta, no explanation
Which of the following quantities from the Black-Scholes-Merton option pricing formula gives the risk-neutral probability that a European put option will be exercised?
On 1 February 2016 you were told that your refinery company will need to purchase oil on 1 July 2016. You were afraid of the oil price rising between now and then so you bought some August 2016 futures contracts on 1 February 2016 to hedge against changes in the oil price. On 1 February 2016 the oil price was $40 and the August 2016 futures price was $43.
It's now 1 July 2016 and oil price is $45 and the August 2016 futures price is $46. You bought the spot oil and closed out your futures position on 1 July 2016.
What was the effective price paid for the oil, taking into account basis risk? All spot and futures oil prices quoted above and below are per barrel.
Question 834 option, delta, theta, gamma, standard deviation, Black-Scholes-Merton option pricing
Which of the following statements about an option (either a call or put) and its underlying stock is NOT correct?
| European Call Option | ||
| on a non-dividend paying stock | ||
| Description | Symbol | Quantity |
| Spot price ($) | ##S_0## | 20 |
| Strike price ($) | ##K_T## | 18 |
| Risk free cont. comp. rate (pa) | ##r## | 0.05 |
| Standard deviation of the stock's cont. comp. returns (pa) | ##\sigma## | 0.3 |
| Option maturity (years) | ##T## | 1 |
| Call option price ($) | ##c_0## | 3.939488 |
| Delta | ##\Delta = N[d_1]## | 0.747891 |
| ##N[d_2]## | ##N[d_2]## | 0.643514 |
| Gamma | ##\Gamma## | 0.053199 |
| Theta ($/year) | ##\Theta = \partial c / \partial T## | 1.566433 |