Consider a XYZ stock index spot price is 69 and 7-months forward price is 70. The continuously compounded dividend yield and risk-free interest rate are 3% and 5% respectively. Market maker could take arbitrage opportunity by (long/short) forward contract and (long/short) synthetic forward contract which includes (buying/selling) stock and (borrowing / lending) money.

Consider a XYZ stock index spot price is 69 and 7-months forward price is 70. The continuously compounded dividend yield and risk-free interest rate are 3% and 5% respectively. Market maker could take arbitrage opportunity by (long/short) forward contract and (long/short) synthetic forward contract which includes (buying/selling) stock and (borrowing / lending) money.

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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11. Changes to the security market line The following graph plots the current security market line (SML) and indicates the return that investors require from holding stock from Happy Corp. (HC). Based on the graph, complete the table that follows: CAPM Elements Value Risk-free rate (rRFrRF) ________? Market risk premium (RPMRPM) __________? Happy Corp. stock’s beta ___________? Required rate of return on Happy Corp. stock ___________? An analyst believes that inflation is going to increase by 3.0% over the next year, while the market risk premium will be unchanged. The analyst uses the Capital Asset Pricing Model (CAPM). The following graph plots the current SML.
Consider the following multifactor (APT) model of security returns for a particular stock. Factor Inflation Industrial production Oil prices Expected rate of return Factor Beta 1.8 1.3 0.9 a. If T-bills currently offer a 9% yield, find the expected rate of return on this stock if the market views the stock as fairly priced. (Do not round intermediate calculations. Round your answer to 1 decimal place.) Factor Inflation Industrial production Oil prices Expected rate of return % b. Suppose that the market expects the values for the three macro factors given in column 1 below, but that the actual values turn out as given in column 2. Calculate the revised expectations for the rate of return on the stock once the "surprises" become known. (Do not round intermediate calculations. Round your answer to 1 decimal place.) Expected Value 5% Factor Risk Premium 7% 4 2 10 6 % Actual Value 3% 6 0
Suppose you observe the following situation: Security Beta Expected Return Pete Corp. 1.50 0.160 Repete Co. 1.19 0.133 Assume these securities are correctly priced. Based on the CAPM, what is the expected return on the market? (Do not round intermediate calculations. Round the final answers to 2 decimal places.) Expected Return on Market Pete Corp. % Repete Co. % What is the risk-free rate? (Do not round intermediate calculations. Round the final answer to 3 decimal places.) Risk-free rate
Consider the following multifactor (APT) model of security returns for a particular stock. Factor Risk Premium 8% 9 7 Factor Inflation Industrial production Oil prices Factor Beta 1.1 0.6 0.3 a. If T-bills currently offer a 7% yield, find the expected rate of return on this stock if the market views the stock as fairly priced. (Do not round intermediate calculations. Round your answer to 1 decimal place.) X Answer is complete but not entirely correct. Expected rate of return 19.0 X %
Assume the Black-Scholes framework. You are given: i. S(t) is the stock price at time t. ii. The stock's volatility is 25%. iii. The continuously compounded expected rate of return is 8%. iv. The stock pays dividends continuously at a rate of 3% proportional to its price. v. The continuously compounded risk-free interest rate is 4%. vi. The current stock price is S (0) 125. Calculate Pr (S (4) > 150 S (2) - 120). Possible Answers A. 0.30 0.40 C 0.65 D. 0.70 0.85
Consider the three stocks in the following table. Pt represents price at time t, and Qt represents shares outstanding at time t. Stock C splits two-for-one in the last period (t=2). Po A 100 B 60 C 120 Qo 100 200 200 P₁ 105 55 130 Rate of return b. An equally weighted index. Rate of return Q₁ 100 200 200 % P2 % 105 55 65 Calculate the first-period rates of return on the following indexes of the three stocks (t = O to t = 1): (Do not round intermediate calculations. Round your answers to 2 decimal places.) a. A market value-weighted index. Q2 100 200 400
In a financial market a stock is traded with a current price of 50. Next period the priceof the stock can either go up with 30 per cent or go down with 25 per cent. Risk-freedebt is available with an interest rate of 8 per cent. Also traded are European optionson the stock with an exercise price of 45 and a time to maturity of 1, i.e. they maturenext period.i) Find prices of Arrow-Debreu securities.
Please show step by step work (not in excel): What is the call option premium given the following information? What would happen to the call price if the company initiated and paid a dividend before the expiration of the option? What would happen to the call premium if the expiration of the option expanded beyond the current 9 months? Stock price $36.00 Strike price $30.00 Volatility 16% Dividend Yield 0.00 Time 0.75 Riskfree Rate 2.70%
4
Scenario 2: The following table shows the returns for the market index (Market - M) and the returns for two stocks (Asset X & Y) under three scenarios. Assume each scenario has an equal chance of occurring (33%). Bad Okay Good Market - M-5% 5% 15% Asset - X -2%-3% 25% Asset - Y -4%-6% 30% What is the correlation of "Asset - Y" to "Market M"? enter your number to two decimal places without the percent sign. Example 23% enter as .23.
Use the Black-Scholes formula to find the value of a call option based on the following inputs. (Round your final answer to 2 decimal places. Do not round intermediate calculations.) Stock price Exercise price Interest rate Dividend yield Time to expiration Standard deviation of stock's returns Call value GA $ $ $ 48 60 0.07 0.04 0.50 0.26
Suppose you observe the following situation: Security Beta Expected Return Peat Company 1.70 13.60 Re - Peat Company 0.85 10.80 Assume these securities are correctly priced. Based on the CAPM, what is the expected return on the market? What is the risk - free rate?

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