Chapter 8
Swaps
n Question 8.1
We first solve for the present value of the cost per two barrels: $22 $23 + = 41.033. 1.06 (1.065)2 We then obtain the swap price per barrel by solving: x+ x = 41.033 1.06 (1.065)2 x = 22.483, which was to be shown.
n Questi
Student Name: Class: Problem 6-19 PEM, INC. 1. Contribution margin ratio: Total Sales Less variable expenses Contribution margin Break-even point: Sales Variable expense Fixed expense Profits Break-even point (units) Break-even point (dollars) Alternative
Chapter 6 Investments and Receivables
1
INVESTMENTS
Can be short-term (current asset) or longterm q Categories include:
q
Financial instruments (e.g. certificates of deposit) Equity securities (stocks of other companies) Debt securities (bonds of other c
Chapter 4
Income Measurement and Accrual Accounting
1
Financial Statements = Means of Communication
Recognition and Measurement concepts crucial to success of accounting as a form of communication q What economic events should be RECOGNIZED in the financi
Chapter 3
nual An e por t R
Processing Accounting Information
1
Economic Events and Transactions
An ECONOMIC EVENT is a happening of consequence to an entity q Events may be internal or external q A TRANSACTION is an event that can be measured and is reco
Chapter 2
Financial Statements and the Annual Report
1
Financial Reporting
Objective of financial reporting is to PROVIDE INFORMATION for decision-making q Information must be USEFUL if used for decision-making q For information to be USEFUL must have cer
Chapter 14
Real Options
n Question 14.1
Note that, in order to get the answers exact, the up and down factors are u = e0.30 and d = 1/u. The discount rate for the cash flows (which we use with real-world probabilities) is 0.07 + 2 (0.11 0.07) = 15%. The p
Chapter 13
Corporate Applications
n Question 13.1
One could first value equity (E) as a call option and value the debt by subtracting equity from the asset value (i.e., B = A E). We chose the insurance approach. We start with valuing default-free debt whi
Chapter 12
Financial Engineering and Security Design
n Question 12.1
Let R = e.06. The present value of the dividends is R 1 + (1.50) R 2 + 2 R 3 + (2.50) R 4 + 3 R 5 = 8.1317. The note originally sells for 100 8.1317 = 91.868. With the 50 cent permanent
Chapter 11
The Black-Scholes Formula
n Question 11.1
You can use the NORMSDIST function of Microsoft Excel to calculate the values for N ( d1 ) and N ( d2 ). NORMSDIST(z) returns the standard normal cumulative distribution evaluated at z. Here are the int
Chapter 10
Binomial Option Pricing
n Question 10.1
1.
25 Since Cu = 25 and Cd = 0 we have = 50 = 0.50. To solve the bond amount, one could use Equation (10.2); however, once we know the options , finding the replicating bond position is a simple algebra e
Chapter 9
Parity and Other Option Relationships
n Question 9.1
This problem is an application of put-call-parity for a stock with a continuous dividend. We have: P (35, 0.5) = C (35, 0.5) e T S0 + e rT 35 0.06 0.5 0.04 0.5 P (35, 0.5) = $2.27 e 32 + e 35
Chapter 7
Interest Rate Forwards and Futures
n Question 7.1
We can use (7.1) and solve for the effective annual yield as follows: 1 [1+r (0, n)]n [1 + r (0, n)]n = P (0, n)1 1/ n r (0, n) = P (0, n) 1 P (0, n) = We can determine the continuous rate for ma
Chapter 6
The Wide World of Futures Contracts
n Question 6.1
The current exchange rate is 0.02 / , which implies 50 / . The euro continuously compounded interest rate is 0.04, the yen continuously compounded interest rate is 0.01. Time to expiration is 0.
Chapter 5
Financial Forwards and Futures
n Question 5.1
Four different ways to sell a share of stock that has a price S0 at time 0. Get Paid at Time 0 T 0 T Lose Ownership of Security at Time 0 0 T T
Description Outright Sale Security Sale and Loan Sale S
Chapter 4
Introduction to Risk Management
n Question 4.1
The following table summarizes the unhedged and hedged profit calculations: Copper price in one year $0.80 $0.90 $1.00 $1.10 $1.20 Unhedged profit $0.10 0 $0.10 $0.20 $0.30 Profit on short forward $
Chapter 3
Insurance, Collars, and Other Strategies
n Question 3.1
This question is a direct application of put-call parity (Equation 3.1) of the textbook. Mimicking Table 3.1, we have: S&R Index 900.00 950.00 1000.00 1050.00 1100.00 1150.00 1200.00 S&R Pu
Chapter 2
An Introduction to Forwards and Options
n Question 2.1
The payoff diagram of the stock is just a graph of the stock price as a function of the stock price:
In order to obtain the profit diagram at expiration, we have to incorporate the initial c
Chapter 1
Introduction to Derivatives
n Question 1.1
We will look at the CME
1. The CME trades derivatives (specifically futures and options on futures) on a wide variety of assets and indices/variables. Assets include basic commodities such as Cattle, Ho
Determination of Interest Rates
Components of demand and supply in the market for loanable funds What determines the quantity demanded by each of these components? The supply of loanable funds The equilibrium interest rate
1
Determination of Interest Rat
Chapter 5
Cash and Internal Control
CASH SOME BASIC QUESTIONS
x What
is the key to classifying an asset as cash? x What does cash consist of? x What are cash equivalents x Where do Cash & Cash Equivalents show up on the financial statements?
Gap Inc. Cons
Chapter 1
Accounting as a Form of Communication
1
What is Accounting?
Identifying to users for decision making
Measuring
Financial Information
Communicating
2
What do Financial Accountants do?
x
Track information
Use a system based on ACCOUNTING EQUATION