Fight Finance

Courses  Tags  Random  All  Recent  Scores

Question 140  IRR, NPV, profitability index

A project has an internal rate of return (IRR) which is greater than its required return. Select the most correct statement.

Question 281  equivalent annual cash flow

You just bought a nice dress which you plan to wear once per month on nights out. You bought it a moment ago for $600 (at t=0). In your experience, dresses used once per month last for 6 years.

Your younger sister is a student with no money and wants to borrow your dress once a month when she hits the town. With the increased use, your dress will only last for another 3 years rather than 6.

What is the present value of the cost of letting your sister use your current dress for the next 3 years?

Assume: that bank interest rates are 10% pa, given as an effective annual rate; you will buy a new dress when your current one wears out; your sister will only use the current dress, not the next one that you will buy; and the price of a new dress never changes.

Question 283  portfolio risk, correlation, needs refinement

Three important classes of investable risky assets are:

  • Corporate debt which has low total risk,
  • Real estate which has medium total risk,
  • Equity which has high total risk.

Assume that the correlation between total returns on:

  • Corporate debt and real estate is 0.1,
  • Corporate debt and equity is 0.1,
  • Real estate and equity is 0.5.

You are considering investing all of your wealth in one or more of these asset classes. Which portfolio will give the lowest total risk? You are restricted from shorting any of these assets. Disregard returns and the risk-return trade-off, pretend that you are only concerned with minimising risk.

Question 374  debt terminology

Which of the following statements is NOT equivalent to the yield on debt?

Assume that the debt being referred to is fairly priced, but do not assume that it's priced at par.

Question 382  Merton model of corporate debt, real option, option

In the Merton model of corporate debt, buying a levered company's shares is equivalent to:

Question 580  price gains and returns over time, time calculation, effective rate

How many years will it take for an asset's price to quadruple (be four times as big, say from $1 to $4) if the price grows by 15% pa?

Question 732  real and nominal returns and cash flows, inflation, income and capital returns

An investor bought a bond for $100 (at t=0) and one year later it paid its annual coupon of $1 (at t=1). Just after the coupon was paid, the bond price was $100.50 (at t=1). Inflation over the past year (from t=0 to t=1) was 3% pa, given as an effective annual rate.

Which of the following statements is NOT correct? The bond investment produced a:

Question 793  option, hedging, delta hedging, gamma hedging, gamma, Black-Scholes-Merton option pricing

A bank buys 1000 European put options on a $10 non-dividend paying stock at a strike of $12. The bank wishes to hedge this exposure. The bank can trade the underlying stocks and European call options with a strike price of 7 on the same stock with the same maturity. Details of the call and put options are given in the table below. Each call and put option is on a single stock.

European Options on a Non-dividend Paying Stock
Description Symbol Put Values Call Values
Spot price ($) ##S_0## 10 10
Strike price ($) ##K_T## 12 7
Risk free cont. comp. rate (pa) ##r## 0.05 0.05
Standard deviation of the stock's cont. comp. returns (pa) ##\sigma## 0.4 0.4
Option maturity (years) ##T## 1 1
Option price ($) ##p_0## or ##c_0## 2.495350486 3.601466138
##N[d_1]## ##\partial c/\partial S##   0.888138405
##N[d_2]## ##N[d_2]##   0.792946442
##-N[-d_1]## ##\partial p/\partial S## -0.552034778  
##N[-d_2]## ##N[-d_2]## 0.207053558  
Gamma ##\Gamma = \partial^2 c/\partial S^2## or ##\partial^2 p/\partial S^2## 0.098885989 0.047577422
Theta ##\Theta = \partial c/\partial T## or ##\partial p/\partial T## 0.348152078 0.672379961


Which of the following statements is NOT correct?

Question 838  option, put call parity

A stock, a call, a put and a bond are available to trade. The call and put options' underlying asset is the stock they and have the same strike prices, ##K_T##.

Being long the call and short the stock is equivalent to being:

Question 924  foreign exchange rate, forward foreign exchange rate, arbitrage, forward interest rate, no explanation

The yield curve in the United States of America and Australia is flat. Currently, the:

  • USD federal funds rate is 1% pa;
  • AUD cash rate is 1.5% pa;
  • Spot AUD exchange rate is 1 USD per AUD;
  • One year forward AUD exchange rate is 0.97 USD per AUD.

You suspect that there’s an arbitrage opportunity.

Which one of the following statements about the potential arbitrage opportunity is NOT correct?