Fight Finance

(a) The firm issuing more debt and using the proceeds to repurchase stock.

(b) The firm issuing more equity and using the proceeds to pay off debt holders.

(c) The firm's industry becoming more systematically risky, for example if it was a mining company whose performance became more sensitive to countries' GDP growth, so the correlation of the firm's returns with the market was higher.

(d) The firm's industry becoming less systematically risky, for example if it was a child care centre and the government announced higher subsidies for parents using child care centres, so the correlation of the firm's returns with the market was lower.

(e) None of the above.

Two call 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) 11 years

(b) 9 years

(c) 7 years

(d) 5 years

(e) 3 years

(a) $71.2986

(b) $62.0921

(c) $61.5028

(d) $54.276

(e) $53.5612

You deposit cash into your bank account. Have you or your money?

(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) 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) To buy consumables like food and clothes at the shops.

(b) For a ‘rainy day’ such as becoming sick and having to pay for a doctor.

(c) To preserve their wealth, such as keeping cash under the bed, in the piggy bank or in a safe.

(d) To invest in assets such as houses, shares or bonds if they become cheap.

(e) To gamble and waste on the poker machines at the casino.

(a) Pay straightaway then you only have to pay $99.

(b) Pay on the 10th day then you’ll be asked to pay the full $100.

(c) Pay on the 11th day then you’ll be asked to pay the full $100.

(d) Pay on the 30th day then you’ll be asked to pay the full $100.

(e) Pay on the 40th day then you’ll be asked to pay the full $100 and the business owner may be upset with you and might not give you credit next time.

(a) $0.287263739

(b) $0.398141032

(c) $1.142227853

(d) $1.667914067

(e) $2.193600281