3330_PS8_Solution - Cornell University Gregory Besharov...

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Cornell University Gregory Besharov Economics 3330: Problem Set 8 Solutions 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. False. According to the efficient markets theory, buy and sell signals will result in random buying and selling, so the expected losses will be exactly the transactions costs. b. A short position in a call option will result in a loss if the stock price exceeds the exercise price. False. It will if the difference between the stock price and the exercise price is greater than the future value of the premium. c. The value of a call option at expiration equals zero or the exercise price minus the stock price, whichever is higher. False. At expiration, the value of a call option is zero or the stock price minus the exercise 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
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This note was uploaded on 11/15/2009 for the course ECON 3330 at Cornell University (Engineering School).

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3330_PS8_Solution - Cornell University Gregory Besharov...

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