Midterm_II_Key_Fall_2009

Midterm_II_Key_Fall_2009 - Department of Economics...

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Unformatted text preview: Department of Economics Professor O’Brien Lehigh University Fall 2009 Eco 29 Midterm II B Name: K ey TA’S Name and Recitation Time: 1. Take time to think before answering. Make sure your answers to the short-answer questions are clear and legible. In order to receive full credit, you must Show your work. 2. In order that everyone has the same amount of information available to answer the problems, we won’t be able to respond to requests for clarification or elaboration. Honor Code: PLEASE READ AND SIGN: The work on this midterm exam is entirely my own. During this exam I have not received assistance from anyone, nor have I given assistance to anyone. I have not cheated in any way. —-——-——.—____—_—___ (Your signature) 1. (4 pts) a. Suppose you are a wheat farmer. It is now September and you intend to have 50,000 bushels of wheat harvested and ready to sell in November. The current spot market price of wheat is $2.50 per bushel and the current December fixtures price of wheat is $2.75 per bushel. Should you buy or sell wheat futures? If each wheat futures contract is for 5,000 bushels, how many contracts will you buy or sell, and how much will you spend or receive in buying or selling futures contracts? YmMI/Wid $9M .wkw Wax/QB. ym gym” [0 Comm/ads fax 3&76‘ XTO,c/c/o 36M b. It is now November and you sell 50,000 bushels of wheat at the spot price of $2.60 per bushel. If the futures price is $2.85 and you settle your position in the futures market, what was your gain or loss on your futures market position? Did you completely hedge your risk from price fluctuations in the Wheat market? Give a numerical explanation. 7/0“ WC.in q537c 3—00 L07 SQL-lwxé [O Wyatt” 9/. WM se++l~€ ywt/ Pam—Hm Wk 8‘30th t w 107/ buying Waugh/21H; LA... NQWMIOW { ': 5'00. wig? YC WWW Matt/[00ft L055 0w yam/V Posi'fim {Le/{W Wwi 2. (4 pts) a. Suppose you expect Longs Drug Store to pay a dividend of $10.00 per share at the end of the current year, and you expect the dividend to grow at a rate of 5 percent per year forever. If your required return on this investment is 10 percent, and if Longs’ share price is currently $185, should you invest in the stock? Briefly explain. -—— 3(0)de I BBC/mac WES ualwr is (Mst “(4/ka ouer Prim m SWCV) Si/WM “Arrest "(t/Him b. Use the data in the following table on Treasury securities of different maturities to answer the question: Date 1 yr 2 yr 3 yr l0/15/09 0.36 0.97 1.50 Assuming the liquidity premium hypothesis is correct, on October 15, 2009, what did investors expect the interest rate to be on the one-year Treasury bill two years from now if the term premium (or risk premium) on a two—year Treasury note is 0.05 and the term premium on a three- year lreasurynotersOJO‘?‘ £9th + if «C 2 15+(Jr‘r~=7'.e":l.“f?5 Otci'7 " 9% Q 0'0 (“fer-f { 0.3“ («9+ 6;; [30 =- Car + 0‘10 3 '0 ‘9 37 91w 1 lag/O 3. (4 pts) The following list of call and put options for Amazon is from the Wall Street Journal: Amazon ( AMZN ) Underlying stock price: 93.60 _ l _ Call Put Expiratlon Strike Last Volume Open Interest Last Volume Open Interest Oct 105.00 0.03 341 3863 11.52 55 1511 Nov 105.00 1.73 1509 6799 13.30 12 289 Jan 105.00 3.59 73 8453 13.60 14 584 Apr 105.00 6.70 3 152 17.30 1 125 a. Why do are the put options selling for higher prices than the call options? 7L0 (Duff (whim) are at“ {WW/Me WM and have PUSIHN Mutt/insi‘c who, Gui/tile m MUCH/“1”” 0K M 04 m WW and WM Zem [bdrm/3:2 Vfi 6 Voting, 1). Why does the April call sell for a higher price than the January call? I 11M Prim diam UPJVEM F8 9W1 t? W Helms}: vm Pm MM WWW “WWW flm f—o ewpwaefiw) gal/a 31% 531410513 Vqu r! m 14W W +12% {W‘QWW’V‘} bgwxmpwbfi’hfi/ W WW WM mm Mfr) W1 WW H We. c. What is the price of the January call option? What is its intrinsic value? $325? flu 37‘?le rim/“me (‘5 “(EM W4“ W9 (Di/LL? (7/) MMdWKyH/lj fijvdé/ 50 W [MTWWSFC WLULQ U 26er d. What is the price of the January put option? What is its intrinsic value? W3zw fm—{mss‘c Mac : PM you w $32M 1:, WA 949 4. (3 pts) a. Use the following information to prepare the balance sheet for Gringott’s National Bank (GNB): The bank has $20 million in US. Treasury bills, $20 million in demand deposits, $5 million in vault cash, $5 million in loans from other banks, $30 million in mortgage-backed securities, $30 million in commercial and industrial loans, $5 million in discount loans from the Federal Reserve, $30 million in other checkable deposits, $10 million is savings account deposits, $8 million in deposits at the Federal Reserve, $10 million in cash items in the process of collection, and owns a building worth $4 million. b. Here are the Federal Reserve’s current reserve requirements: Amount of Transactions Deposits Reserve Requirement $0to $10.7 million More than $10.7 million to $55.2 million More than $55.2 million How much in excess reserves does GNB have? H. Multiple Choice. Select the best answer. 1/2 point each. 1. The problem of adverse selection in equity and debt contracts arises from the lender’s relative lack of information about the potential returns and risks of the borrower’s investment activities. ‘0. the lender’s inability to legally require sufficient collateral to cover a 100 percent loss if the borrower defaults. c. the borrower’s lack of incentive to seek a loan for a highly risky investment. d. the lender’s inability to restrict the borrower from Changing his behavior once given a loan. 2. a. According to the segmented markets hypothesis the interest rate on a long-term bond will equal the average of the short—term interest rates that people expect to occur over the life of the long-term bond. Buyers of bonds do not prefer bonds of onematurity over another. @ Interest rates on bonds of different maturities do not move together over time. d. Buyers of bonds require an additional incentive to hold short—tenn bonds. F" 3. Which of the following types of information is most likely to allow the exploitation of a profit opportunity in a financial market? . a. Investment analysts’ published recommendations b. Technical analysis c. Hot tips from a stock broker . Inside information 4. The price of oil, as reported in the Wall Street Journal, is typically a. the spot price. b. the options price. _ @the price of the nearest futures contract on the NYMEX. d. the price of the December forward contract on the NYSE. 5. “Private label” mortgage—backed securities are issued by a. the Federal Reserve. b. Fannie Mae. Q investment banks. d. the Federal Housing Finance Agency. 6. “Alt-A” mortgages are also referred to as a. sub-prime mortgages. b. option ARM mortgages. @ liars” loans. d. collateralized debt obligations or CD05. 7. In John Chrin’s talk to the class, he indicated that the entry level position for someone interested in pursuing a career in mergers and acquisitions at an investment bank is @ an analyst. b. an associate. c. a market researcher. d. a clerk. 8. 'Last Friday, the Nasdaq closed at a. 2157. b 9996 c 1088 d 1256 9. The concept of adverse selection helps to explain a. why collateral is not a common feature of many debt contracts. ’0. why large, well-established corporations find it so difficult to borrow funds in securities markets. @Why financial markets are among the most heavily regulated sectors of the economy. (1. Why stocks are the most important source of external financial for businesses. 10. To say that stock prices follow a "random walk” is to argue that stock prices a. rise,_ then fall, then rise again. ‘0. fall, then rise, then fall again. 0. are likely to rise if they have been rising in the recent past and fall if they have been falling in the recent past. cannot be predicted based on past trends. ...
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Midterm_II_Key_Fall_2009 - Department of Economics...

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