exam 2 review solutions

# exam 2 review solutions - Test#2 Definitions Review Match...

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Test #2 Review Definitions Match each given word with the definition below by placing the letter answer next to the appropriate word. G Stock Options D Call Option E Put Option H European Option A American Option C Strike Price I Value of a put or call B Risk free Rate J Risk free Ratio F Volatility A. An option that may be exercised at any time. B. The rate of investments guaranteed by the federal government. The annual interest rate for a B week United States Treasury Bill, compounded continuously. C. The pre-specified price at which the option holder may buy or sell an option. D. The right to buy a stock. E. The right to sell a stock. F. The extent of a stock’s price fluctuation. Stocks whose price fluctuates widely continues in this fashion. Stocks that are stable continue to remain stable. G. Securities which give the owner the right, but not the obligation, to buy or sell the stock for a pre-specified price, over a specific period of time. H. An option that is exercised at its expiration date. I. Maximum of zero or C – S or S – C. J. Ratios of one weekly close to the comparable close for the preceding week.

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1. Suppose \$2,000 is left in an account that pays 4% interest. How much money is in the account at the end of 5 years, if interest is compounded weekly ? 62 . 2442 \$ 52 04 . 1 2000 ) 5 * 52 ( = + = F 2. Find the value of \$1,500,000 after 7 years and 5 months, if it is invested at a rate of 4.7% compounded continuously. ( 29 94 . 587 , 125 , 2 \$ 1500000 42 . 7 12 5 7 5 7 12 89 047 . 0 = = = = e F Pe F mon yrs rt 3. Find the annual rate, r, that produces an effective annual yield of 4.15%, when compounded continuously. Round your answer to 3 places. % 066 . 4 ) 0415 . 1 ln( 0415 . 1 1 0415 . 0 1 = = = - = - = r r e e e y r r r 4. How long, to the nearest whole month, will it take \$40,000 to grow to \$75,000 if 5.6% interest is compounded continuously? 3months 11years t onths 12(0.225)m 11years t t 0.056 ln(1.875) 11.225 0.056t ln(1.875) e 1.875 40000e 75000 0.056t 0.056t = = = = = = = 5. Assume Y is an exponential random variable with parameter α = 5. (i) Find P ( Y 4), rounded to 3 decimal places. % 1 . 18 ) , , 4 ( exp 1 ) 4 ( 5 1 5 4 = = - = - true ondist e Y P
(ii) Find P ( Y = 5) % 35 . 7 ) 5 ( 5 5 5 1 = = = - e Y P (iii) Find E ( Y ) E(Y) = α = 5 6. Let X be a binomial random variable with n = 20 and p = 0.78. Use BINOMDIST to create a table listing all possible values of X and the corresponding values f X (x). No print out from Excel is necessary. Find the P(X < 8) and the P(X > 11). Find the expected value of the random variable X. Use print preview to print only ONE page. Your name must be on the print out. x

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exam 2 review solutions - Test#2 Definitions Review Match...

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