428_sample_FinalExam_sol_09 - 428 Valuation Spring 2008...

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428 Valuation Spring 2008 Prelim 2 Solution Multiple Choice 5 points each (total 40 points) 1. You analyze an industry selling consumer staples the unit prices of which rises at the rate of inflation. For next year you project a 5% increase in the unit sales of the industry and expect inflation to be 2%. Hence, you expect the industry’s sales next year to be: a) 5% higher than the industry’s sales this year b) 7% higher than the industry’s sales this year c) 9% higher than the industry’s sales this year d) 10% higher than the industry sales this year e) 12% higher than the industry sales this year Ans: b) 2. Based on your analysis of the economy and the industry you project industry-wide sales to increase by 25%. XYZ expects its sales to increase by 75%. The implied growth of the market share of XYZ is: a) 25% b) 40% c) 50% d) 75% Ans: b The implied growth of XYZ’s market share is (1+75%)/(1+25%) – 1 = 0.4 =40% ANS: B 3. A stock is worth $40 today. In the next six months it may increase to $46 or decrease to $35. The risk-free rate of interest is 4% per year. Use the binomial model to determine the price of a put option with a strike price of $39 and an expiration date in six months. a. 3.62 b. 1.85 c. 2.32 d. 3.10 e. 2.50
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4. You purchase a European call option with one year to expiration for $2.50. The exercise price is $25 per share and the current stock price is $22. You also purchase a put option on the same stock with the same exercise price and the same expiration date for $5. If the stock price rises to $26 at the end of the year the call option payoff is __________ and the put option payoff is __________. a. $1; -$1 b. -$1; $1 c. $0; $1 d. $1; $0 e. none of the above ANS: B 5. Option prices __________ as time to expiration __________ and as the risk of the underlying asset __________. a. decrease; increases; increases b. increase; increases; increases c. increase; decreases; increases d. increase; decreases; decreases e. decrease; increases; decreases ANS: C 6. The hedge ratio is based on: a. the combination of stocks and bonds that eliminates most risk b. the combination of stocks and bonds that eliminates all risk c. the combination of stocks and calls that eliminates all risk d. the combination of bonds and calls that eliminates most risk e. none of the above ANS: A 7. If a combination of stock and options is risk-free, then that combination must sell for the same price as __________. a. a risk-free bond b. the underlying stock c. the call option d. the synthetic put option e. none of the above ANS: B 8. The Black and Scholes model was originally conceived to price an __________ on an underlying stock that paid no dividends. a. American call option
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This note was uploaded on 09/23/2009 for the course AEM 4280 taught by Professor Ng,d. during the Spring '08 term at Cornell University (Engineering School).

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428_sample_FinalExam_sol_09 - 428 Valuation Spring 2008...

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