For a price of $1040, Camille will sell you a share which just paid a dividend of $100, and is expected to pay dividends every year forever, growing at a rate of 5% pa.

So the next dividend will be ##100(1+0.05)^1=$105.00##, and the year after it will be ##100(1+0.05)^2=110.25## and so on.

The required return of the stock is 15% pa.

A three year bond has a fixed coupon rate of 12% pa, paid semi-annually. The bond's yield is currently 6% pa. The face value is $100. What is its price?

Your friend just bought a house for $**1,000,000**. He financed it using a $**900,000** mortgage loan and a deposit of $**100,000**.

In the context of residential housing and mortgages, the 'equity' or 'net wealth' tied up in a house is the value of the house less the value of the mortgage loan. Assuming that your friend's only asset is his house, his net wealth is $100,000.

If house prices suddenly fall by **15%**, what would be your friend's percentage change in net wealth?

Assume that:

- No income (rent) was received from the house during the short time over which house prices fell.
- Your friend will not declare bankruptcy, he will always pay off his debts.

**Question 312** foreign exchange rate, American and European terms

If the current AUD exchange rate is USD 0.9686 = AUD 1, what is the American terms quote of the AUD against the USD?

**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:

A trader **sells** one crude oil European style **call** option contract on the CME expiring in one year with an exercise price of $44 per barrel for a price of $6.64. The crude oil spot price is $40.33. If the trader doesn’t close out her contract before maturity, then at maturity she will have the:

A **one** year European-style **call** option has a strike price of $**4**. The option's underlying stock pays no dividends and currently trades at $**5**. The risk-free interest rate is **10**% pa continuously compounded. Use a **single** step binomial tree to calculate the option price, assuming that the price could rise to $**8** ##(u = 1.6)## or fall to $**3.125** ##(d = 1/1.6)## in one year. The call option price now is:

**Question 890** foreign exchange rate, monetary policy, no explanation

The market expects the Reserve Bank of Australia (RBA) to **increase** the policy rate by **25** basis points at their next meeting. The current exchange rate is **0.8** USD per AUD.

Then unexpectedly, the RBA announce that they will increase the policy rate by **50** basis points due to increased fears of inflation.

What do you expect to happen to Australia's exchange rate on the day when the surprise announcement is made? The Australian dollar is likely to suddenly:

**Question 980** balance of payments, current account, no explanation

Observe the below graph of the US current account surplus as a proportion of GDP.

Define lending as buying (or saving or investing in) debt and equity assets.

The sum of US ‘net private saving’ plus ‘net general government lending’ equals the US:

**Question 1003** Black-Scholes-Merton option pricing, log-normal distribution, return distribution, hedge fund, risk, financial distress

A hedge fund issued zero coupon bonds with a combined $**1** billion **face** value due to be paid in **3** years. The promised yield to maturity is currently **6**% pa given as a continuously compounded return (or log gross discrete return, ##LGDR=\ln[P_T/P_0] \div T##).

The hedge fund owns stock assets worth $**1.1** billion now which are expected to have a **10**% pa arithmetic average log gross discrete return ##(\text{AALGDR} = \sum\limits_{t=1}^T{\left( \ln[P_t/P_{t-1}] \right)} \div T)## and **30**pp pa standard deviation (SDLGDR) in the future.

Analyse the hedge fund using the Merton model of corporate equity as an option on the firm's assets.

The risk free government bond yield to maturity is currently **5**% pa given as a continuously compounded return or LGDR.

Which of the below statements is **NOT** correct? All figures are rounded to the sixth decimal place.