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2010_FIN300_Fall_Final_Practice

# 2010_FIN300_Fall_Final_Practice - UNIVERSITY OF MICHIGAN...

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Page 1 of 9 UNIVERSITY OF MICHIGAN ROSS SCHOOL OF BUSINESS BUS FIN 300 Financial Management Erica Li Some Practice Final Problems Fall 2010 Your Name: Section: Instructions: 1. These are some practice problems for the 2010 Fall final. However, this packet is for your own review benefit only and should not necessarily be taken as representative of exam question difficulty or exam topic weighting. 2. I think the best strategy of study is to (in order): a. Review the lecture notes b. Review the homeworks closely c. Do these practice problems d. Review the midterm solutions 3. Since a number of people were interested in doing problems from the book, I posted the solutions manual online. However, the book may not be completely representative of exam questions.

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Page 2 of 9 I. Options. 1. A one-month European put option on a non-dividend-paying stock is currently selling for \$2.50. The stock price is \$47, the strike price is \$50, and the risk-free interest rate is 6% APR compounded monthly. What opportunities are there available for arbitrage, and what is the arbitrage profit? Hint #1: Is there enough information to do this problem? Hint #2: Am I tricking you with Hint #1? 2. The current stock price of Intrawest is \$20 per share and the one-year risk-free interest rate is 8%. A one-year put on Intrawest with a strike of \$18 sells for \$3.33, while the identical call sells for \$7. Explain what arbitrage opportunities are available (if any) and compute the arbitrage profit. 3. The assets of Uptown Stores are currently worth \$136,400. These assets are expected to be worth either \$120,000 or \$150,000 one year from now. The company has a pure discount bond outstanding with a \$130,000 face value and a maturity date of one year. The risk-free rate is 4.3 percent. What is the value of the equity in this firm? 4. Consider a 45-strike straddle , which involves buying one 45-strike call and one 45-strike put. Draw the payoff diagram for this option. How do you create a straddle using only calls, stocks, and borrowing/lending?
Page 3 of 9 II. Review Problems. 1. Given the following two stocks A and B, Stock E[r] Beta A 0.12 1.2 B 0.14 1.8 If the expected return on the market is 0.09 and the risk-free rate is 0.05, which stock is the better buy and why? A. A because it offers an alpha of 1.2% B. B because it offers an alpha of 1.8% C. A because it offers an alpha of 2.2% D. B because it offers an expected return of 14% E. None of the above 2. Consider stocks A and B. The expected return on A is 12% and the expected return on B is 5%. The volatility of A’s return is 20% and the volatility of B is 15%. Suppose I want to form a portfolio of A and B such that my expected portfolio return is 7%. What is the increase in portfolio volatility when the correlation of A and B’s returns increases from 0.5 to 0.98? 3.

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2010_FIN300_Fall_Final_Practice - UNIVERSITY OF MICHIGAN...

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