For a price of $129, Joanne will sell you a share which is expected to pay a $30 dividend in one year, and a $10 dividend every year after that forever. So the stock's dividends will be $30 at t=1, $10 at t=2, $10 at t=3, and $10 forever onwards.
The required return of the stock is 10% pa.
For a price of $100, Vera will sell you a 2 year bond paying semi-annual coupons of 10% pa. The face value of the bond is $100. Other bonds with similar risk, maturity and coupon characteristics trade at a yield of 8% pa.
Bonds A and B are issued by the same company. They have the same face value, maturity, seniority and coupon payment frequency. The only difference is that bond A has a 5% coupon rate, while bond B has a 10% coupon rate. The yield curve is flat, which means that yields are expected to stay the same.
Which bond would have the higher current price?
Which of the below formulas gives the profit ##(\pi)## from being short a put option? Let the underlying asset price at maturity be ##S_T##, the exercise price be ##X_T## and the option price be ##f_{LP,0}##. Note that ##S_T##, ##X_T## and ##f_{LP,0}## are all positive numbers.
A pig farmer in the US is worried about the price of hogs falling and wants to lock in a price now. In one year the pig farmer intends to sell 1,000,000 pounds of hogs. Luckily, one year CME lean hog futures expire on the exact day that he wishes to sell his pigs. The futures have a notional principal of 40,000 pounds (about 18 metric tons) and currently trade at a price of 63.85 cents per pound. The underlying lean hogs spot price is 77.15 cents per pound. The correlation between the futures price and the underlying hogs price is one and the standard deviations are both 4 cents per pound. The initial margin is USD1,500 and the maintenance margin is USD1,200 per futures contract.
Which of the below statements is NOT correct?
Which of the following quantities is commonly assumed to be normally distributed?
Question 809 Markowitz portfolio theory, CAPM, Jensens alpha, CML, systematic and idiosyncratic risk
A graph of assets’ expected returns ##(\mu)## versus standard deviations ##(\sigma)## is given in the graph below. The CML is the capital market line.
Which of the following statements about this graph, Markowitz portfolio theory and the Capital Asset Pricing Model (CAPM) theory is NOT correct?
A one year European-style put option has a strike price of $4.
The option's underlying stock currently trades at $5, pays no dividends and its standard deviation of continuously compounded returns is 47% pa.
The risk-free interest rate is 10% pa continuously compounded.
Use the Black-Scholes-Merton formula to calculate the option price. The put option price now is:
This question is about the Balance of Payments. Australia's current account as a percent of nominal gross domestic product (GDP) per annum is shown in the graph below.
Assume that all foreign and domestic assets are either debt which makes interest income or equity which makes dividend income, and vice versa for liabilities which cost interest and dividend payments, respectively.
Which of the following statements is NOT correct?
A stock is expected to pay its semi-annual dividend of $1 per share for the foreseeable future. The current stock price is $40 and the continuously compounded risk free rate is 3% pa for all maturities. An investor has just taken a long position in a 12-month futures contract on the stock. The last dividend payment was exactly 4 months ago. Therefore the next $1 dividend is in 2 months, and the $1 dividend after is 8 months from now. Which of the following statements about this scenario is NOT correct?