Fight Finance

(a) $138m

(b) $142m

(c) $143m

(d) $172m

(e) $176m

Two put options are exactly the same, but one has a low and the other has a high exercise price. Which option would you expect to have the higher price, the option with the or exercise price, or should they have the price?

(a) Asset A has the same systematic risk as asset B.

(b) Asset A has more total variance than asset B.

(c) Asset B has zero idiosyncratic risk. Asset B must be a portfolio of half the market portfolio and half government bonds.

(d) If risk-averse investors were forced to invest all of their wealth in a single risky asset, so they could not diversify, every investor would logically choose asset A over the other three assets.

(e) Assets M and B have the highest Sharpe ratios, which is defined as the gradient of the capital allocation line (CAL) from the government bonds through the asset on the graph of expected return versus total standard deviation.

(a) Continuously compounded rate is 5.955445% per annum. Note that this rate is the annual rate with continuous compounding.

(b) Continuously compounded rate is 1.500000% per quarter. Note that this rate is the quarterly rate with continuous compounding.

(c) Effective quarterly rate is 1.500000% per quarter. Note that this rate is the quarterly rate with discrete quarterly compounding.

(d) Effective annual rate is 6.136355% per annum. Note that this rate is the annual rate with discrete annual compounding.

(e) $1,000,000 invested in this bank account for one year will give $1,061,363.551 at the end of the year.

(a) Yes, in 117 months, which is 9 years and 9 months.

(b) Yes, in 152 months, which is 12 years and 8 months.

(c) Yes, in 202 months, which is 16 years and 10 months.

(d) Yes, in 240 months, which is 20 years.

(e) No, it will take longer than 20 years to pay off the loan.

(a) The mean (expected or arithmetic average) portfolio value in one year is $1,072,508. The median (50th percentile) portfolio value in one year is $1,051,271.

(b) The annual 99% relative VaR is $391,591.

(c) The annual 99% absolute VaR is $340,320.

(d) The 98% confidence interval of portfolio values in one year ##(V_1)## is ##\$659,680 < V_1 < \$1,675,312,977##.

(e) The 98% confidence interval of continuously compounded portfolio returns over the next year ##(r_{0 \rightarrow 1})## is ##-41.6\% < r_{0 \rightarrow 1} < 51.6\%##.

(a) It's 'out of the money'.

(b) It will give a positive profit: ##-c_0 + max(S_T-K_T,0) > 0##.

(c) It will give a positive payoff at maturity: ##max(S_T-K_T,0) > 0##.

(d) The underlying asset price is below the option strike price: ##S_T < K_T##.

(e) The underlying asset price is above the break-even price.

(a) Basis risk makes hedges more risky.

(b) Basis risk can only lead to worse than expected effective dollar prices.

(c) Basis risk only occurs when the future is closed out early, before it matures.

(d) ‘The basis’ is defined as the underlying spot price less the futures price quote ##(S_t - F_{t,T})##.

(e) The futures price of oil will tend to be higher than the spot price due to storage costs, so the basis will tend to be positive for hedgers who long futures contracts.

(a) Provide a permanent and unrestricted commitment of funds;

(b) Are freely available to absorb losses;

(c) Impose unavoidable servicing charges against earnings;

(d) Rank behind the claims of depositors and other creditors in the event of winding-up of the issuer.

(a) 162.83 points

(b) 220.56 points

(c) 226.43 points

(d) 230.91 points

(e) 317.45 points