3.Spot futures parity is an equilibrium condition involving the following variables: A) stock price, exercise price, time to maturity, interest rates B) domestic interest rate, forward rate, foreign interest rate, spot rate C) forward rates, spot rates, interest rates, time to maturity D) domestic interest rate, stock price, foreign interest rate, exercise price 4.Cash and carry arbitrage and reverse cash and carry arbitrage apply A) when dealing with dividend paying stocks B) when dealing with derivative markets involving options C) when dealing with non-dividend paying stocks D) when dealing with an equilibrium condition

3.Spot futures parity is an equilibrium condition involving the following variables: A) stock price, exercise price, time to maturity, interest rates B) domestic interest rate, forward rate, foreign interest rate, spot rate C) forward rates, spot rates, interest rates, time to maturity D) domestic interest rate, stock price, foreign interest rate, exercise price 4.Cash and carry arbitrage and reverse cash and carry arbitrage apply A) when dealing with dividend paying stocks B) when dealing with derivative markets involving options C) when dealing with non-dividend paying stocks D) when dealing with an equilibrium condition

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter24: Enterprise Risk Management

Section: Chapter Questions

Problem 1Q: Define each of the following terms: a. Derivatives b. Enterprise risk management c. Financial...

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a) define the following, and discuss the difference between them at origination, before expiration, and at expiration. ◦forward price and the value of a forward contract ◦futures price and the value of a futures contract b) discuss the assumptions under which futures and forward prices can be considered the same. c) describe how to incorporate discrete and continuous dividends into futures contracts on stocks and stock indices. d) explain and discuss the use of interest rate parity in pricing foreign currency forwards and futures. e) describe how spot prices are determined using the cost-of-carry model.
Which of the following is NOT an external method of interest rate risk management? * A. Using an interest rate swap B. Using financial futures C. Using an off-balance-sheet strategy, such as a forward rate agreement D. Having fixed-interest assets financed by fixed-interest liabilities and equity
What is the spread (i.e., difference) between futures price and spot price called? a) Convergence b) Basis risk c) Market risk d) Credit risk
Market risks are: B. Interest rate risk, foreign exchange risk, portfolio concentration, commodity price risk D. Equity price risk, interest rate risk, foreign exchange risk, commodity price risk C. Foreign exchange risk, commodity price risk, issue risk, credit risk A. Equity price risk, transaction risk, foreign exchange risk, commodity price risk
T/F a. According to Expectation theory, long-term rates are geometric average of current and expected short-term rates. b. The swap curve usès on-the-run prices at plot points. C. When a bond is traded, the seller owes the buyer accrued interest. d. Higher inflation rates lead to higher required interest rates. e. If prices increase, then velocity and/or quantities decrease. f. Quantitative easing adds liquidity when the federal funds rate is negative. g. Bonds may trade in advance of Treasury auction. h. Off the run bonds are the most recently auctioned off for a given initial maturity. i. The yield curve never uses the on-the-run Treasuries. j. If the yield curve in upward sloping, investors expect lower inflation or real rates.
Question 1. Let St be the current price of a stock that pays no dividends. a)Let rbid be the interest rate at which one can invest/lend money, and roff be theinterest rate at which one can borrow money, rbid≤roff. Both rates are continuously compounded. Using arbitrage arguments, find upper and lower bounds for the forwardprice of the stock for a forward contract with maturity T > t. b)How does your answer change if the stock itself has bid price St,bid and offer price St,off?
Consider the supply and demand equilibrium bond graph of the market. Consider the effects of the following scenarios on bond prices, bond interest rates and equilibrium quantities traded. a. Firms expect a decrease in their future profits. b. Expected rises. inflation
Choose the best answer 1.) A place or system that primarily allows trading of financial assets with a maturity of more than one year 2.) Allows trade of commodities and contracts wherein they are to be delivered on a future date but at a set price 3.) A place or system that allows trading of highly liquid and short-term securities A.) Futures market B.) Bond market C.) Primary market D.) Money market E.) Capital market F.) Organized market G.) Over-the-counter market H.) Secondary market I.) Cash market
Explain what a first-to-default credit default swap is. Does its value increase or decrease as the default correlation between the companies in the basket increases? Explain.
Provide a numerical example of an arbitrage strategy for situations where the forward is trading above, and below the theoretical forward price.
Question 2: State whether the following statements are true or false. Efficient Market Hypothesis means Securities are normally in equilibrium and are “fairly priced. The market is IN equilibrium when the required rate of return larger than the dividend growth rate.
3. In which of the following markets would ordinary stock most likely be traded? A. Loans market B. Commodities market C. Capital market D. Money market