Fight Finance

(a) The NPV is negative $1m.

(b) The IRR is 9.09% pa, less than the 10% cost of capital.

(c) The payback period is infinite, the project will never pay itself off.

(d) The project should be rejected.

(e) If the project is accepted then the market value of the firm's assets will fall by $1m.

(a) 20%

(b) 36%

(c) 60%

(d) 75%

(e) 93.75%

(a) ##f_{SC,T}=max⁡(S_T-X_T,0)##

(b) ##f_{SC,T}=max⁡(X_T-S_T,0)##

(c) ##f_{SC,T}=-max⁡(S_T-X_T,0)##

(d) ##f_{SC,T}=-max⁡(X_T-S_T,0)##

(e) ##f_{SC,T}=min⁡(X_T-S_T,0)##

(a) Buyers of futures are required to pay an initial margin at the start.

(b) Futures are a zero-sum game in the sense that the winner gains at the expense of the loser.

(c) Buyers of futures have to pay the futures price at the start.

(d) Buyers of futures do not care about the credit risk of the original future seller since the contract is novated by the exchange.

(e) Speculators who sell futures hope that the underlying asset price falls.

(a) Prefer more to less, meaning that they will always like to have more wealth.

(b) Be risk averse, meaning that they dislike risk as measured by the standard deviation of wealth.

(c) Have a positively sloped utility function, so the gradient or first derivative of the utility function is always positive.

(d) Have a utility function that increases at a diminishing rate. So the shape is concave down like a frown, or the second derivative is always negative.

(e) Have a utility function that rises until it reaches the satiation point, then it falls because too much wealth causes problems.

(a) Firm A is less risky than Firm B. Firm A would have a higher credit rating.

(b) Firm A has the absolute advantage issuing bonds in both the fixed and floating coupon bond markets.

(c) Firm A has a comparative advantage issuing bonds in the floating coupon bond market.

(d) The net benefit from the swap available to Firm A is 0.25%.

(e) The swap rate between Firm B and the Bank would be 2.5% pa.

(a) As time elapses, call option prices always fall.

(b) As time elapses, put option prices always fall.

(c) The long future always has a zero Gamma.

(d) The more in-the-money the long call option is, the higher (more positive) is its Delta.

(e) The more in-the-money the long put option is, the lower (more negative) is its Delta.

(a) Have Sharpe ratios equal to the market’s.

(b) Have Treynor ratios equal to the market's.

(c) Have Jensen’s alphas that are zero.

(d) Not necessarily be bought or sold since there's no gain either way.

(e) Plot on the Security Market Line (SML).

If a put option is at-the-money, then the spot price (##S_0##) is than, than or to the put option's strike price (##K_T##)?