test1011_21003_2Q.pdf - Erasmus School of Economics FEM21003– Asset Pricing(QF-Variant Written examination General information Date examination

# test1011_21003_2Q.pdf - Erasmus School of Economics...

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Erasmus School of Economics FEM21003– Asset Pricing (QF-Variant) Written examination General information Date examination: 5/7/2011 Lecturer: E. Kole Duration: 13.30 – 16.30 Number of questions 7 questions Number of pages: 7 (incl. cover page) Instructions You are allowed to use a non-graphical calculator during the examination. You are not allowed to use a graphical calculator during the examination. You are not allowed to use notes during the examination. You are not allowed to use books during the examination. You are not allowed to use a dictionary during the examination. It is allowed to take the examination papers with you after the examination. Additional information The total amount of points you can obtain in this exam is 70. Your number of points divided by 7/10 determines the grade for this exam. Please answer the questions in a concise and to-the-point way. Good luck! Please notice: if you have not registered for this examination, you can only do so on the day of the examination itself, against payment of 50.- in administrative charges at the Information Desk of the ESC (H6-02). If your examination ends after 16.00 or takes place on a Saturday, payment has to take place on the next working day.

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Part I: Theory (36 points) 1. ( 11 points ) We consider a stylized model of the troubles in Greece. We model the Greek economy by a representative investor, who has a position in long term debt and Greek equity. We also model the European economy by a representative investor, who has takes the other side for the long term debt, and invests the remainder in the European equity market. We consider the portfolios that the both investors have at time t . They constructed these portfolios at some point in time t 0 < t . The Greek investor has sold 10 zero-coupon bonds with a nominal value of EUR 100 to the European investor. She has invested the proceedings together with her original endowment in 20 shares of Greek equity. The European investor has a position the remainder of her original endowment in 190 shares of European equity. Both investors cannot invest in foreign equity. In the nearby future ( t + 1), one out of three states of the world may be realized. In the first state, with a probability of 0.3, the Greek investor pays back his debts in full, Greek shares have a value of EUR 80 and European shares of EUR 110. In the second state, with a probability of 0.5, the Greek investor pays back only EUR 80 for every bond, Greek shares have a value of EUR 90 and European shares have a value of EUR 100. In the third state, with a probability of 0.20, Greece leaves the Euro-zone, and reintroduces the Greek Drachma (GRD). The exchange rate will be 1.40 Drachma per Euro (GRD/EUR). The debt to the European investor remains denominated in Euros, but the Greek investor only pays back EUR 60 per bond.

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