Question 218 NPV, IRR, profitability index, average accounting return
Which of the following statements is NOT correct?
A student won $1m in a lottery. Currently the money is in a bank account which pays interest at 6% pa, given as an APR compounding per month.
She plans to spend $20,000 at the beginning of every month from now on (so the first withdrawal will be at t=0). After each withdrawal, she will check how much money is left in the account. When there is less than $500,000 left, she will donate that remaining amount to charity.
In how many months will she make her last withdrawal and donate the remainder to charity?
Question 405 DDM, income and capital returns, no explanation
The perpetuity with growth formula is:
###P_0= \dfrac{C_1}{r-g}###
Which of the following is NOT equal to the total required return (r)?
Question 494 franking credit, personal tax on dividends, imputation tax system
A firm pays a fully franked cash dividend of $100 to one of its Australian shareholders who has a personal marginal tax rate of 15%. The corporate tax rate is 30%.
What will be the shareholder's personal tax payable due to the dividend payment?
Total cash flows can be broken into income and capital cash flows.
What is the name given to the cash flow generated from selling shares at a higher price than they were bought?
Question 606 foreign exchange rate, American and European terms
Which of the following FX quotes (current in October 2015) is given in American terms?
Mr Blue, Miss Red and Mrs Green are people with different utility functions. Which of the statements about the 3 utility functions is NOT correct?
Question 923 omitted variable bias, CAPM, single factor model, single index model, no explanation
Capital Asset Pricing Model (CAPM) and the Single Index Model (SIM) are single factor models whose only risk factor is the market portfolio’s return. Say a Taxi company and an Umbrella company are influenced by two factors, the market portfolio return and rainfall. When it rains, both the Taxi and Umbrella companies’ stock prices do well. When there’s no rain, both do poorly. Assume that rainfall risk is a systematic risk that cannot be diversified and that rainfall has zero correlation with the market portfolio’s returns.
Which of the following statements about these two stocks is NOT correct?
The CAPM and SIM:
Question 956 option, Black-Scholes-Merton option pricing, delta hedging, hedging
A bank sells a European call option on a non-dividend paying stock and delta hedges on a daily basis. Below is the result of their hedging, with columns representing consecutive days. Assume that there are 365 days per year and interest is paid daily in arrears.
| Delta Hedging a Short Call using Stocks and Debt | |||||||
| Description | Symbol | Days to maturity (T in days) | |||||
| 60 | 59 | 58 | 57 | 56 | 55 | ||
| Spot price ($) | S | 10000 | 10125 | 9800 | 9675 | 10000 | 10000 |
| Strike price ($) | K | 10000 | 10000 | 10000 | 10000 | 10000 | 10000 |
| Risk free cont. comp. rate (pa) | r | 0.05 | 0.05 | 0.05 | 0.05 | 0.05 | 0.05 |
| Standard deviation of the stock's cont. comp. returns (pa) | σ | 0.4 | 0.4 | 0.4 | 0.4 | 0.4 | 0.4 |
| Option maturity (years) | T | 0.164384 | 0.161644 | 0.158904 | 0.156164 | 0.153425 | 0.150685 |
| Delta | N[d1] = dc/dS | 0.552416 | 0.582351 | 0.501138 | 0.467885 | 0.550649 | 0.550197 |
| Probability that S > K at maturity in risk neutral world | N[d2] | 0.487871 | 0.51878 | 0.437781 | 0.405685 | 0.488282 | 0.488387 |
| Call option price ($) | c | 685.391158 | 750.26411 | 567.990995 | 501.487157 | 660.982878 | ? |
| Stock investment value ($) | N[d1]*S | 5524.164129 | 5896.301781 | 4911.152036 | 4526.788065 | 5506.488143 | ? |
| Borrowing which partly funds stock investment ($) | N[d2]*K/e^(r*T) | 4838.772971 | 5146.037671 | 4343.161041 | 4025.300909 | 4845.505265 | ? |
| Interest expense from borrowing paid in arrears ($) | r*N[d2]*K/e^(r*T) | 0.662891 | 0.704985 | 0.594994 | 0.551449 | ? | |
| Gain on stock ($) | N[d1]*(SNew - SOld) | 69.052052 | -189.264008 | -62.642245 | 152.062648 | ? | |
| Gain on short call option ($) | -1*(cNew - cOld) | -64.872952 | 182.273114 | 66.503839 | -159.495721 | ? | |
| Net gain ($) | Gains - InterestExpense | 3.516209 | -7.695878 | 3.266599 | -7.984522 | ? | |
| Gamma | Γ = d^2c/dS^2 | 0.000244 | 0.00024 | 0.000255 | 0.00026 | 0.000253 | 0.000255 |
| Theta | θ = dc/dT | 2196.873429 | 2227.881353 | 2182.174706 | 2151.539751 | 2266.589184 | 2285.1895 |
In the last column when there are 55 days left to maturity there are missing values. Which of the following statements about those missing values is NOT correct?