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European-style options on foreign currencies trade at the Philadelphia Exchange. A call option on sterling with an exercise price of 0.925 £/$ and a time to expiration of 3 months has a price of 0.0125 £/$. The current price of sterling is USD 0.94 £/$, the volatility is 3%, the risk-free rate of interest on U.S. dollars is 5.40% continuous and the risk-free rate of interest on sterling is 5.80% continuous. Is there an arbitrage opportunity? If there is such an opportunity, what is the arbitrage profit and what is the strategy to earn it?
Suppose an individual invests $40,000 in a load mutual fund for two years. The load fee entails an up-front commission charge of 4.4 percent of the amount invested and is deducted from the original funds invested. In addition, annual fund operating e..
Managers have some flexibility in setting the estimated useful lives of depreciable assets. Explain how this could allow managers to manipulate earnings. Would depreciation be considered a variable cost or a fixed cost?
You are given the following information for Huntington Power Co. Assume the company’s tax rate is 38 percent. Debt: 7,000 6.8 percent coupon bonds outstanding, $1,000 par value, 30 years to maturity, selling for 104 percent of par; the bonds make sem..
What is the beta of an asset with an expected return of 16%, if the risk-free rate of interest is 6% and the expected market portfolio risk premium is 6%? Accurate to two decimal places.
Identify common financial factors for an MNC to consider when assessing country risk. Briefly elaborate on how each factor can affect the risk to the MNC.
Banks sometimes quote interest rates in the form of “add-on interest.” In this case, if a 1-year loan is quoted with a 19.0% interest rate and you borrow $1,000, then you pay back $1,080. But you make these payments in monthly installments of $90 eac..
Pam purchases a perpetuity-immediate that makes quarterly payments. the first payment is 20 and each payment thereafter increases by 2. Lucy purchases a 15-year annuity-immediate which makes annual payments. the first payment is 100, and each payment..
Go to a financial Web site, such as finance.yahoo.com, google.com/finance, or moneycentral.msn.com. Obtain information on the yields and maturity for: U.S. treasuries, Municipal bonds, Corporate bonds
Which of the following factors does not affect a firm's business risk?
Calculate the present value of the future cash flow, given the following information: (a) Future Payment: $25,000, (b) Interest Rate: 5%, and (c) Number of Periods: 10.
You have purchased a multi tenant office building for $15,000,000. Your acquisition costs associated with this purchase are $25,000. The estimated land value is $3,000,000, of which you estimate the depreciable land portion at $1,000,000. What is you..
Discuss the tradeoffs between active and passive portfolio management. Explain how a portfolio manager adds value relative to a benchmark. Discuss in some detail the steps for determining an asset swap spread.
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