3330_PS8 - Cornell University Gregory Besharov Economics...

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Cornell University Gregory Besharov Economics 3330: Problem Set 8 Due November 3, 2008 1. True/False/Explain State whether each of the following is true or false and explain your answer. Please limit your explanations to no more than two sentences. a. Efficient markets theory predicts that using buy and sell signals from the (technical) moving average approach will result in expected losses greater than the transactions costs of buying and selling. b. A short position in a call option will result in a loss if the stock price exceeds the exercise price. c. The value of a call option at expiration equals zero or the exercise price minus the stock price, whichever is higher. 2. Homeowners who owe more on their houses than the house is worth sometimes stop making payments and abandon them. When they mail their keys back to their lender, it is sometimes referred to as “jingle mail.” Describe this behavior in terms of an option. What would be the strike price? Most mortgages do not legally allow homeowners to walk away. If a mortgage did have a provision that allowed the owner to
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This note was uploaded on 11/15/2009 for the course ECON 3330 at Cornell.

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3330_PS8 - Cornell University Gregory Besharov Economics...

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