FIN 7042 Mid-term Exam
Practice
I UNDERSTAND AND ACCEPT THE UC ACADEMIC HONOR CODE
Solutions
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INSTRUCTIONS:
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FIN 7042 Mid-term Exam
Fall 2012
I UNDERSTAND AND ACCEPT THE UC ACADEMIC HONOR CODE
Solutions
_
Signature
INSTRUCTIONS:
(1) Please keep your writing large enough to make it easy to read. You have three hours
to write answers to the five multi-part Problem
FIN 7042 Mid-term Exam
Practice
I UNDERSTAND AND ACCEPT THE UC ACADEMIC HONOR CODE
_
Signature
INSTRUCTIONS:
(1) Please keep your writing large enough to make it easy to read. You have three hours
to write answers to seven problems found on these 17 pages
FIN 7042 Derivatives Markets and Securities
Problem Set #10
Due 11/28/2012
Problem 1: For this problem, modify the relevant parts of the Black/Derman/Toy model in the
spreadsheet discussed last class. This spreadsheet is called Fixed Income Derivatives
Ex
FIN 7042
Homework #6 Solutions
Due 10/10/2012
Problem 1:
There is a technique for determining the probability of default for a firm that has debt that is
based on the Black/Scholes option formula. The argument is as follows: Assume the debt is a
zero-coup
FIN 7042
Assignment #9
Due 11/14/2011
Consider the following true evolution of the annualized short-term (i.e., 6-month) rates over the
next year. The first .05 (at the start of the tree) is the current (i.e., t = 0) annualized 6-month
rate; the .06 and t
FIN 7042 Options and Futures
Problem Set #7
Due 10/31/2012
Problem 1:
The consumer products firm Procter and Gamble has an idea to leverage its Mr. Clean detergent
brand by designing and developing a set of Mr. Clean car washes. However, they have noticed
Q1 (Steps 1 and 2 below) and Q2 (Step 3 below)
Short-Rate (i.e. 6-month rate) Tree
0.07
0.06
0.05
0.05
0.04
0.03
t=0
t = .5
t=1
Step 1: Find Prob of up and down now given 1-year bond price:
Price 1-year bond
0.599937 = Prob of up
0.400063 = Prob of down
(
Finance 7042 Practice Final Exam
Fall 2012
I UNDERSTAND AND ACCEPT THE UNIVERSITY OF CINCINNATI ACADEMIC
HONOR CODE
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Signature
INSTRUCTIONS:
(1) Please keep your writing neat and large enough to make it easy to read. You have
four and a half hours to wri
Finance 7042 Practice Final Exam
Fall 2012
I UNDERSTAND AND ACCEPT THE UNIVERSITY OF CINCINNATI ACADEMIC
HONOR CODE
Slezaks Solutions
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Signature
INSTRUCTIONS:
(1) Please keep your writing neat and large enough to make it easy to read. You have
four and a
FIN 7042
Homework #4 Solutions
Due 10/03/2012
Problem 1:
Using the Black/Scholes formula, value a European put option on the equity in Amgen
that has the following characteristics.
Expiration:
Current stock price of Amgen:
Strike Price:
Volatility of Amge
N9: Futures and Forwards
I. N9B: Hedging
II. N9C: Pricing
1
II. Pricing Futures and Forwards
Consumption vs. Investment Assets:
Investment assets are assets held by
significant numbers of people purely for
investment purposes (Examples: gold,
silver)
Co
N9: Futures and Forwards
I. N9B: Hedging
II. N9C: Pricing
1
I. Hedging
Long & Short Hedges:
A long futures hedge is appropriate when
you know you will purchase an asset in
the future and want to lock in the price
A short futures hedge is appropriate
whe
N9A: Futures and
Forwards
Notes based on Hull, Options, Futures, and Other Derivatives
1
Futures and Forwards
Futures
What are they?
Marked to Market Mechanics
Hedging
Tax Treatment
Payoff/Profit Diagrams
Futures
versus Forwards
N9B and N9C:
Hedgin
N5C: Black-Scholes Model;
Corporate Applications
Conflicts between Debt and Equity
Conflicts between Debt and Equity
Typically, managers are supposed to maximize the value of the firm.
In doing so, they maximize the wealth of shareholders. Since
sharehold
N4: The Black-Scholes
Model
1
Black-Scholes Model
Option pricing theory was pioneered by Black and Scholes, thus the
Black-Scholes formula for options that we are about to see. Myron
Scholes earned the Nobel prize in economics in 1997, together with Bob
N7: Real Options
Types of Real Options
DCF and Real Options
Examples:
Option to Abandon
Option to Expand
Option to Wait
Real Options
A real option exists when a subsequent
decision or reaction affects the future
payoffs
Example: If you own a piece