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Implementation of the Binomial market model
In the following we consider June vanilla options for two stocks: Google Inc or Microsoft.
(a) Use appropriate current Treasury bill data to determine a continuously compounded interest rate suitable to price June options. Note: You need to indicated your sources of data and document your procedure.
(b) Find the historical volatilities ˆσ of the stock estimated from all closing prices of the stock for the last 3 months, 6 months, and 12 months. Notes: You need to indicated your sources and show your computations.
(c) Using an appropriate Binomial model approximation that is consistent with the observed historial volatilities and the observed interest rate of the t-bill, find the price of liquid American and European call or put options of your choice on one of the stocks.
An exchange rate is currently 0.8000. The volatility of the exchange rate is quoted as 12% and interest rates in the two countries are the same. Using the lognormal assumption, estimate the probability that the exchange rate
An investment offers a total return of 11 percent over the coming year. Bill Bernanke thinks the total real return on this investment will be only 7.4 percent. What does Bill believe the inflation rate will be over the next year?
Assume that you want to speculate on how six month cash market LIBOR now equal to 1.95% will move over the next year. You believe that consensus forecasts of future rates are too high. You can enter into an FRA and agree either to pay 2.25 percent an..
Assuming that the company’s overall beta is 1.2102. The risk-free rate is 5%, and the required rate of return on the market is 11%. You are considering a low-risk project whose market beta is 0.5 less than the company’s overall beta.
You have just purchased an investment that generates the following cash flows for the next four years. You are able to reinvest these cash flows at 8.08 percent, compounded annually. How much is this investment worth today? What is the present value ..
List three examples of businesses that use some sort of device to electronically collect information that can be used for forecasting. The best examples would be from a workplace or area about which you have some special knowledge.
Suppose that each of two investments has a 4% chance of loss of $ 10 million, a 2% chance that of loss of $1 million, and a 94% chance of profit of $1 million. What is the VaR for one of the investments when the confidence level is 95%? What is the e..
The yield to maturity for 15-year bonds is as follows for four different bond rating categories. Use Appendix B and Appendix D for an approximate answer but calculate your final answer using the formula and financial calculator methods.
Using the expectations theory, what is the yield on a 1-year bond, one year from now? Calculate the yield using a geometric average. What is the expected inflation rate in Year 1?
You make $7,200 annual deposits into a retirement account that pays 11.3 percent interest compounded monthly. How large will your account balance be in 33 years?
Your firm needs to invest in a new delivery truck. The life expectancy of the delivery truck is five years. You can purchase a new delivery truck for an upfront cost of $200,000, or you can lease a truck from the manufacturer for five years for a mon..
Your firm is contemplating the purchase of a new $555,000 computer-based order entry system. The system will be depreciated straight-line to zero over its five-year life. It will be worth $55,000 at the end of that time. Reject Accept At what level o..
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