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Arbitrage and PPP. Assume that locational arbi- trage ensures that spot exchange rates are properly aligned. Also assume that you believe in purchasing power parity. The spot rate of the British pound is $1.80. The spot rate of the Swiss franc is £0.30. You expect that the one-year inflation rate will be 7% in the United Kingdom, 5% in Switzerland, and 1% in the United States. The one-year interest rate is 6% in the United Kingdom, 2% in Switzerland, and 4% in the United States. What is your expected spot rate of the Swiss franc in one year with respect to the US dollar? Show your work.
Dandle’s Candles will be producing a new line of dripless candles in the coming years and has the choice of producing the candles in a large factory with a small number of workers or a small factory with a large number of workers. Calculate the accou..
Johnny Cake Ltd. has 8 million shares of stock outstanding selling at $20 per share and an issue of $40 million in 8 percent annual coupon bonds with a maturity of 16 years, selling at 90.5 percent of par. Assume Johnny Cake’s weighted-average tax ra..
Consider a 1-period binomial model with R=1.02, S0=100, u=1/d=1.05. 1.Compute the value of a European call option on the stock with strike K=102. The stock does not pay dividends. 2.When you construct the replicating portfolio for the option in the p..
You are an investor in company which is an auto parts supplier. They will pay a dividend next year of $0.80 per share and are expected to grow at an annual rate of 2%. The price of the stock is currently $37.24. What is the expected return on the sto..
Sprockets sell for $5 and have fixed costs of $1 million per year and variable costs of $2 per sprocket. What is the minimum number of sprockets the company must manufacture annually to not lose money? Solve using excel functions.
You agree to make 24 deposits of $500 at the beginning of each month into a bank account. At the end of the 24th month, you will have $13,200 in your account. If the bank compounds interest monthly, what nominal annual interest rate will you be earni..
CSM Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $493,000 is estimated to result in $192,000 in annual pretax cost savings.
Debt: 8500 bonds, outstanding with a 7.2% coupon, $1000 par value, 25 years to maturity, current market yield is 5,82%, coupons made semi-annually. What is the total market value of the bonds?
Finance Corp has fixed costs of $7 million and profits of $4 million. What is its degree of operating leverage (DOL)?
Assume that the interest rates for both the U.S. and German banks are 2%. You borrow $1M dollars from a U.S. bank for 6 months, convert it to Euros and invest it in a German bank for 6 months. The spot rate is 1.3664 USD per EUR.
What is the equivalent AW of a two-year contract that pays $5,000 at the beginning of the ?rst month and increases by $500 for each month thereafter? i = 12% compounded monthly?
For a call option on a non dividend paying stock the stock price is $30, the strike price is $20, the risk free rate is 6% per annum, the volatility is 20% per annum and the time to maturity is 3 months. Use the Binomial model to find the price of th..
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