STRATEGIC FINANCIAL MANAGEMENT REVISION 1. Selling Currency Call Options. Mike Suerth sold a call option on Canadian dollars for $.01 per unit. The strike price was $.76‚ and the spot rate at the time the option was exercised was $.82. Assume Mike did not obtain Canadian dollars until the option was exercised. Also assume that there are 50‚000 units in a Canadian dollar option. What was Mike’s net profit on the call option? ANSWER: Premium received per unit = $.01 Amount per unit
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rates currently being swapped for three month LIBOR is 12% per annum for all maturities. The three month LIBOR rate one month ago was 11.8% per annum. All rates are compounded quarterly‚ what is the value of the swap? 4. A four month European call option on a non-dividend paying stock is currently selling for $5. The stock price is $64‚ the strike price is $60 and a dividend of $0.80 is expected in one month. The risk free interest rate is 12% per annum for all maturities. What opportunities are there
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Problem 20-6 on Call Options Based on Chapter 20 (Excel file included) You own a call option on Intuit stock with a strike price of $40. The option will expire in exactly 3 months’ time. a) If the stock is trading at $55 in 3 months‚ what will be the payoff of the call? b) If the stock is trading at $35 in 3 months‚ what will be the payoff of the call? c) Draw a payoff diagram showing the value of the call at expiration as a function of the stock price at expiration. Short call: value at expiration
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Chapter 14 14.3. Explain the principle of risk-neutral valuation. The price of an option or other derivative when expressed in terms of the price of the underlying stock is independent of risk preferences. Options therefore have the same value in a risk-neutral world as they do in the real world. We may therefore assume that the world is risk neutral for the purposes of valuing options. This simplifies the analysis. In a risk-neutral world all securities have an expected return equal to risk-free
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MFIN6003 Derivative Securities Dr. Huiyan Qiu End-of-chapter Questions for Practice (with Answers) Following is a list of selected end-of-chapter questions for practice from McDonald’s Derivatives Markets. For students who do not have a copy of the McDonald’s book‚ be aware that a copy of the book is reserved at the main library of the University of Hong Kong for you to borrow for short period of time. Answers provided are for your reference only. It is complied directly from the solution
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glossary‚ determine if the FASB considers options as securities or cash. Explain your position. The FASB considers options as securities. This is evident by the definition provided by the master glossary that states “unless otherwise stated‚ a call option that gives the holder the right to purchase shares of common stock from the reporting entity in accordance with an agreement upon payment of a specified amount. Options include‚ but are not limited to‚ options granted to employees and stock purchase
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of financial options‚ you have been asked to prepare a brief report that firm’s executives can use to gain a cursory understanding of the topic. To begin‚ you gathered some outside materials on the subject and used these materials to draft a list of pertinent questions that need to be answered. In fact‚ one possible approach to the report is to use a question-and-answer format. Now that the questions have been drafted‚ you have to develop the answers. a. What is a financial option? What is the
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E09-G11 Mridul Arora‚ Florent Bernard‚ Jacqueline Kwok‚ Pu Wang E09-G11 Sally Jameson Case 1. How much is the option compensation package worth With the 5-year T-Bill yield‚ we can calculate the rf rate‚ compounded continuously‚ input for the BlackScholes model. e5r = 1 + (5-year T-Bill yield) e5r = 1.0602 r = 0.0117 Exercise price X 35 Given by case text Current stock price Volatility of stock returns Time to maturity S ơ Ƭ 18.75 43% 5 r 6.02% 1.17% Given by case text Approximation given
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Options 4/3/2012 Option: you have the choice to buy something for a certain price but if the price is less than that price forget about the contract. The most you ever pay is the contract price. You have the possibility of doing better. Nothing to lose only gain since you locked in a certain price; seller of contract can only do worse. The person whom makes the contract charges a price to enter into the contract‚ the seller keeps this contract. This price is called the premium‚ options start
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The Society for Financial Studies The Information in Option Volume for Future Stock Prices Author(s): Jun Pan and Allen M. Poteshman Source: The Review of Financial Studies‚ Vol. 19‚ No. 3 (Autumn‚ 2006)‚ pp. 871-908 Published by: Oxford University Press. Sponsor: The Society for Financial Studies. Stable URL: http://www.jstor.org/stable/3844016 . Accessed: 09/04/2013 01:56 Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use‚ available at . http://www
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