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Why will the value of an American put always be greater than or equal to the value of a corresponding European put? Options listed for Digital Equipment were used in the text as an example of option price estimation using implicit variance. The implicit variance from the January 45 option resulted in estimated call prices lower than actual call prices for the April 45 and October 45 options.
Assuming the Black-Scholes OPM is correct, and that all assumptions of the model are met in the marketplace:
What hedge (i.e., riskless) portfolio can be formed to make arbitrage profits with Digital Equipment April 45 options?
To purchase a house for $80,000, a new couple has $12,000 available for down payment. They are considering two options: Option 1: get a new standard mortgage with 10% APR interest compounded monthly for a 30-year term Option 2: What is the effective ..
ExxonMobil ( XOM) is one of the half- dozen major oil companies in the world. The firm has four primary operating divisions ( upstream, downstream, chemical, and global services) as well as a number of operating companies that it has acquired over th..
Dale wants to invest the $57,000 received from his grandfather's estate. Dale plans to use the inheritance to defray the cost of his doctorate education. How much will Dale have in five years if he earns a 6% on the investment?
Forward versus Money Market Hedge on Payables. Assume that the Mississippi Airlines in the United States will need 450,000 ringgit in 90 days. It wishes to hedge this payables position. Would it be better off using a forward hedge or a money market h..
Jiminy's Cricket Farm issued a 30-year, 8 percent semi-annual bond 5 years ago. The bond currently sells for 92 percent of its face value. The book value of the debt issue is $18 million. What is your best estimate of the aftertax cost of debt? What ..
Using NPV calculation, show the preset value of the present collection experience and calculate the NPV of the proposed 2/10, net-30 terms.
Jim Robertson Motors has bonds outstanding which will mature in 12 years. The bonds pay a 12 percent semiannual coupon and have a face value of $1,000 (i.e., the bonds pay a $60 coupon every six months). The bonds currently have a yield to maturity o..
Fluctuation in inflation can occur in the short or long term. For example, rice levels can increase and decrease on a month to month arsis and we can also evaluate inflation rates over time. Therefore, while it may be hard to redict the economic chan..
If an operating lease meets the IRS requirements of being a guideline or tax-oriented lease , which of the following is true? the entire lease payment is expensed "aka tax deductible". the lessor books the depreciation. only the portion of the lease ..
Complete the diagram (right) on the right with 5 "shots" on each target. - For each construct think carefully about your operational definition and then determine whether it is a) qualitative or quantitative b) discrete or continuous.
alculate the Project and Equity Free Cash Flows for the following scenario. We want to finance a project with 30% debt (70% equity). We expect $1,000,000 in sales for next year; COGS to be 55% of sales; depreciation will be $400,000 and offset with $..
What are the differences between a micro hedge and a macro hedge for an FI? Why is it generally more efficient for FIs to employ a macro hedge than a series of micro hedges?
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