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An exchange rate is currently $1.20. The volatility of the exchange rate is quoted as 15% and interest rates in the two countries are the same. Using the lognormal assumption, estimate the probability that the exchange rate in six months will be (a) less than or equal to $1.100, (b) between $1.100 and $1.300, and (c) greater than $1.300. Based on the volatility smile usually observed in the market for exchange rates, which of these probabilities would you expect to be too low and which would you expect to be too high?
"Mr. Art Deco will be paid $100,000 one year hence. This is a nominal flow, which he discounts at an 8% nominal discount rate: PV = 100,000/1.08 = $92,593 The inflation rate is 4%. Calculate the PV of Mr. Deco’s payment using the equivalent real cash..
Your bank is looking for the lowest cost two year, fixed rate financing. It has decided to issue four consecutive three month Eurodollar time deposits on balance sheet and hedge the future borrowing costs by taking positions in the market for basic i..
Would you invest your financial capital in the selected firm as a shareholder and would you invest your human and intellectual capital in the firm as an employee?
An alumni wants to establish a scholarship that covers the full cost of tuition for one high achiever each year in perpetuity. The university, on the advice of the Finance Department has opted to begin awarding it in 5 years. This year, the estimated..
The salvage value at the end of the 10 years is expected to be $1,500,000, which is solely the value of the land. The firm's tax rate is 40 percent, and the firm's discount rate is 15 percent. Based on a discounted cash-flow analysis, should the in..
Over a 40-year period an asset had an arithmetic return of 12.5 percent and a geometric return of 10.4 percent. Using Blume’s formula, what is your best estimate of the future annual returns over 7 years? 11 years? 20 years?
When using a control chart, what are some patterns that would indicate that the process is out of control? Additionally explain what might cause a process to be out of control. In your responses to other students, relate and identify to an example of..
A stock has yielded returns of 6 percent, 11 percent, 14 percent, and -2 percent over the past 4 years, respectively. What is the standard deviation of these returns?
Jensen's Travel Agency has 8 percent preferred stock outstanding that is currently selling for $55 a share. The market rate of return is 10 percent and the firm's tax rate is 34 percent. What is Jensen's cost of preferred stock?
Buffelhead's stock price is $221 and could halve or double in each six-month period (equivalent to a standard deviation of 97%). Assume that you own an American put option on Buffelhead stock with an exercise price of $221. Calculate the value of the..
Absalom Motors's 14% coupon rate, semiannual payment, $1,000 par value bonds that mature in 25 years are callable 6 years from now at a price of $800. The bonds sell at a price of $1,150, and the yield curve is flat. Assuming that interest rates in t..
Which of the following amounts is closest to what should be paid for Overland common stock? Overland has just paid a dividend of $2.25. These dividends are expected to grow at a rate of 5% in the foreseeable future. The required rate of return is 11%..
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