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Doctor turned farmer, Victor Fischer, decides to hedge his crop of 10,000 bushels of corn by selling short European call options on that amount of corn. Currently, corn call options with a $1.60 strike price (per bushel) sell for $0.10 premium. Six month risk-free interest rate is 2%, and Dr. Fischer plans to close his position and sell his corn in six months. Spot price is $1.50 in six months. Dr. Fischer has to post a margin of $1500 at the onset of the transaction, and he does earn interest on that deposit. He does not, however, earn interest on the premium received for the options written, which is held by his broker until the transaction is closed in six months and then paid out to Dr. Fischer. Calculate Dr. Fischer’s effective annual rate of return on the entire hedging transaction (i.e., ignore the funds obtained from the sale of corn, as he would have sold the corn regardless of hedging).
A. 145.44% B. 254.22% C. 156.67% D. 56.67% E. 66.67%
You invest in a portfolio of 5 stocks with an equal investment in each one. The betas of the 5 stocks are as follows: .75, -1.2, .90, 1.3, 1.5. The risk free return is 4% and the market return is 9%. (Not a multiple choice problem) Compute the beta o..
Look in the newspaper and give the direct and indirect rates for the dollar compared to the Swiss Franc, the Euro, the Chinese Yuan, the Japanese Yen, and the Mexican Peso. Be sure to label your rates direct or indirect.?
Campbell Soup Co. (CPB) paid a $0.782 dividend per share in 2003, which grew to $0.98 in 2006. This growth is expected to continue. What is the value of this stock at the beginning of 2007 when the required return is 9.5 percent?
Suppose you invest $4,500 in Stock A and $5,500 in Stock B. The variance of Stock A is 10%, the variance of Stock B is 20%, and the covariance between the two stocks is 1.87%. What is the standard deviation of your portfolio (in percent)?
Weisbro and Sons common stock sells for $34 a share and pays an annual dividend that increases by 3.0 percent annually. The market rate of return on this stock is 10.70 percent. What is the amount of the last dividend paid by Weisbro and Sons?
CSM Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $502,000 is estimated to result in $201,000 in annual pretax cost savings. The press falls in the MACRS five-year class (MACRS Ta..
Boehm Corporation has had stable earnings growth of 8% a year for the past 10 years and in 2013 Boehm paid dividends of $2.6 million on net income of $9.8 million. Calculate Boehm's total dividends for 2014 under of the following policies: Its 2014 d..
What is the accumulated sum of each of the following streams of payments?
Lion's share Inc. just bought a 2.5 million machine that will be depreciated over its 15 year life using straight line depreciation. The marginal tax rate is 35%. What is Lion's share after tax salvage value if the machine is sold in year 7 for 1.75 ..
Consider a four-month futures put option with a strike price of 100 when the risk-free interest rate is 10% per annum. The current futures price is 87. What is a lower bound for the value of the futures option if it is (a) European and (b) American?
How does interest rate risk differ from market risk? You are the risk manager for a $2 billion portfolio of auto loans. Provide some discussion of how you might mitigate this risk.
Your firm has an average collection period of 53 days. Current practice is to factor all receivables immediately at a 2 percent discount. What is the effective cost of borrowing in this case? Assume that default is extremely unlikely.
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