Q10: Stefano has 450 bushels of wheat that he wants to sell in exactly 10 months time. The current price of a bushel is $40. The current risk free rate is 7.5%. He wants to guarantee that he receives a price berween 39.30 and 40.70 for his wheat. He also wants to minimize the amount of cash he has to pay today. Which of the following strategies is best for him? A) Long a $39.30 strike put, and short a $40.70 strike call. B) Long a $40.70 strike call, short a $39.30 strike put. C) Long a $39.30 strike put. D) Short a forward contract (at the forward price). E) Long a $40 strike call, short a $40 strike put.

Q10: Stefano has 450 bushels of wheat that he wants to sell in exactly 10 months time. The current price of a bushel is $40. The current risk free rate is 7.5%. He wants to guarantee that he receives a price berween 39.30 and 40.70 for his wheat. He also wants to minimize the amount of cash he has to pay today. Which of the following strategies is best for him? A) Long a $39.30 strike put, and short a $40.70 strike call. B) Long a $40.70 strike call, short a $39.30 strike put. C) Long a $39.30 strike put. D) Short a forward contract (at the forward price). E) Long a $40 strike call, short a $40 strike put.

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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Which of these situations would you prefer? Solve, a. You invest $2,500 in a certificate of deposit that earns an effective interest rate of 8% per year. You plan to leave the money alone for 5 years, and the general price inflation rate is expected to average 5% per year. Income taxes are ignored. b. You spend $2,500 on a piece of antique furniture. You believe that in 5 years the furniture can be sold for $4,000. Assume that the average general priceinflation rate is 5% per year. Again, income taxes are ignored.
Suppose an investor, Erik, is offered the investment opportunities described in the table below. Each investment costs $1,000 today and provides a payoff, also described below, one year from now. Option Payoff One Year from Now 1 100% chance of receiving $1,100 2 50% chance of receiving $1,000 50% chance of receiving $1,200 3 50% chance of receiving $200 50% chance of receiving $2,000 If Erik is risk averse, which investment will he prefer? The investor will choose option 1. The investor will choose option 2. The investor will choose option 3. The investor will be indifferent toward these options. In contrast to his brother Erik, Devin is a risk lover (or exhibits risk seeking behavior). Which of the following statements is true about Devin? Everything else remaining constant, Devin will prefer option 3. Everything else remaining constant, Devin will prefer option 2. Everything else remaining constant,…
(Related to Checkpoint 5.6) (Solving for i) You are considering investing in a security that will pay you $5,000 in 32 years. a. If the appropriate discount rate is 9 percent, what is the present value of this investment? b. Assume these investments sell for $896 in return for which you receive $5,000 in 32 years. What is the rate of return investors earn on this investment if they buy it for $896? a. If the appropriate discount rate is 9 percent, the present value of this investment is $nothing. (Round to the nearest cent.)
please use the formula not excel. 7. Tim wants to buy an apartment that costs $1,750,000 with an 85% LTV mortgage. Tim got a 30 year, 3/1 ARM with an initial teaser rate of 4.875%. The reset margin on the loan is 300 basis points above 1 year CMT. There are no caps. Tim anticipates the index to be 3.50% at the time of the 1st reset. If the index resets to 3.50% as Tim forecasts, what will his new mortgage payment be in year 4? 8. Tim wants to buy an apartment that costs $1,750,000 with an 85% LTV mortgage. Tim got a 30 year, 3/1 ARM with an initial teaser rate of 3.75%. The reset margin on the loan is 300 basis points above 1 year CMT. There are no caps. The index was 1% at the time of origination. Tim also had to pay 6.5 points for this loan. Compute the true APR (annualized IRR) for this loan.
a) Lasisi would like to buy a royal motorbike for okada business, and it is currently on the market at ¢11,400, but he cannot afford it right now. However, he thinks that he would be able to buy it after 4 years. If the expected inflation rate as applied to the price of this motorbike is 3.9% per year, what is its expected price after four years?(b) Alata Kwaku borrowed ¢2,130 from his uncle and promised to pay him ¢2,720 after 2 years. With annual compounding, find the implied annual rate of interest for this loan.(c) Oberima Adonteng’s bank account pays 8.8% annual interest, compounded monthly. If the present value is ¢2, its future value is ¢4. How long will it take the money to double in the account?
Your younger sibling asks you to borrow $20. You, a smart financial professional, agree but also charge interest on the $20. You plan to collect $5 from your sibling each week for 8 weeks to repay the initial loan. What is the NPV of this project, assuming you invest the $5 at 12%? a. $4.84 b. $2.11 c. $0 d. $6.88
3. Your biotech firm plans to buy a new DNA sequencer for $500,000. The seller requires that you pay 20% of the purchase price as a down payment and is willing to finance the remainder by offering a 48-month loan with equal monthly payments and an interest rate of 0.5% per month. What is the monthly loan payment?
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6. You plan to buy a house that sells for $250,000. You plan to put 10% down and finance the rest. You are exploring the following financing options: i. 30-yr mortgage with a stated annual interest of 6.5% ii. 15-yr mortgage with a stated annual interest of 6%. You plan to pay off the loan by making equal monthly payments. What would be your monthly payment if you take the 30-yr mortgage? How much (total) interest would you pay over the life of the loan? $1422.15, $286,974 b. What would be your monthly payment if you take the 15-yr mortgage? How much (total) interest would you pay over the life of the loan? $1898.68, $116,762.01 a.
(Related to Checkpoint 5.6) (Solving for) You are considering investing in a security that will pay you $4,000 in 31 years. a. If the appropriate discount rate is 10 percent, what is the present value of this investment? b. Assume these investments sell for $2,062 in return for which you receive $4,000 in 31 years. What is the rate of return investors earn on this investment if they buy it for $2,062? C a. If the appropriate discount rate is 10 percent, the present value of this investment is $. (Round to the nearest cent.)
I put down $40,000 toward the $300,000 cost of building the pool. I financed the pool for three years at 4% interest. what is present value?
(Related to Checkpoint 5.4) (Present-value comparison) You are offered $110,000 today or $400,000 in 14 years. Assuming that you can earn 11 percent on your money, which should you choose? If you are offered $400,000 in 14 years and you can earn 11 percent on your money, what is the present value of $400,000? $92797.9392797.93 (Round to the nearest cent.) Which offer should you choose? (Select the best choice below.) A. Choose $110,000 today because its present value is higher. B. Choose $400,000 in 14 years because its present value is higher.

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