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Unformatted text preview: SEEM4640 Financial Decision and Pricing Models First Term, 2011-12 Assignment 1 Due date: 5:00 p.m., 29, September, 2011 Important Notes: 1. You must submit your assignment on time. No late assignment will be accepted. 2. You must drop your assignment into the assignment box A10 . Don’t hand in your assign- ment to the instructor and TAs. 3. Unless otherwise stated, each question carries 4 points. Problems P1.(1-5) An investor enters into a short forward contract to sell 100,000 British pounds for US dollars at an exchange rate of 1.4000 US dollars per pound. How much does the investor gain or lose if the exchange rate at the end of the contract is (a) 1.3900 and (b) 1.4200? (a) The investor is obligated to sell pounds for 1.4000 when they are worth 1.3900. The gain is (1 . 4000- 1 . 3900) × 100 , 000 = $1 , 000. (b) The investor is obligated to sell pounds for 1.4000 when they are worth 1.4200. The loss is (1 . 4200- 1 . 4000) × 100 , 000 = $2 , 000. P2.(1-9) You would like to speculate on a rise in the price of a certain stock. The current stock price is $29 and a 3-month call with a strike price of $30 costs $2.90. You have $5,800 to invest. Identify two alternative investment strategies, one in the stock and the other in an option on the stock. What are the potential gains and losses from each? Illustrate your answer with some hypothetical figures....
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This note was uploaded on 03/01/2012 for the course FINANCE 780 taught by Professor Scott during the Spring '12 term at Missouri State University-Springfield.
- Spring '12