Midterm Exam Fall 2006 - Finance 748 Professor Bill Reese...

Info icon This preview shows pages 1–4. Sign up to view the full content.

Finance 748 Professor - Bill Reese Midterm Exam Fall, 2006 Instructions : The first five pages consist of four problems. The first problem is worth 15 points and the other three are worth 10 points each. You need to show your work for problems 1 and 4. You will need to email me the spreadsheet you use for problem 2. You may use Excel for any of these problems, but in each case, you must start with a blank workbook. If anything else appears on your screen, it will be considered a violation of the honor code. The next six pages contain seven short-answer questions (some with multiple parts). Question 1 is worth 10 points, question 7 is worth 20 points, and the others are worth 5 points each. You should be able to answer each question in the space provided, but if you need extra space, continue working on the back of the page and leave me a note on the front that you are doing so. The formula for Bayes Rule as shown in class is: Pr (P H | buy) = . Pr (buy | P H ) Pr (P H ) . Pr (buy | P H ) Pr (P H ) + Pr (buy | P L ) Pr (P L ) Come to the front to see me if you have any questions. You have until 9:30 to complete this test. I will post your grade for this exam and the course on the website by your number as soon as I have them all graded. Good luck! Name : _____________________________________________
Image of page 1

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

1. Trading Models Problem – be sure to show all your work You are a marketmaker for Dell, which trades on Nasdaq. Due to some recent problems with the batteries on their laptops, you believe that at this time next year, Dell’s price will have either exploded to $28 or fizzled to $18 with equal probability. The risk-based required rate of return has already been included in these probabilities, so you can assume that the required return is zero. a. If everyone has the same information, what should the price of one share of Dell stock be? b. During a typical day, the percentage of insiders (those who know whether Dell’s price will be $28 or $18 next year) is estimated to be 25%. Use the single period model to determine the bid and the ask price you will post for one share of Dell.
Image of page 2
c. A market buy order for one share of Dell comes in and you are the dealer who fills it. You have no idea who was on the other side of the transaction.
Image of page 3

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

Image of page 4
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern