FM2555 REVIEW
Yixing Zhao
Present Values
C1
1+r1
C1
(1+rt )t
I
PV = discount factor C1 =
I
PV = discount factor Ct =
I
rt is the discount rate, hurdle rate of opportunity cost of
capital.
Present Values
I
Discounted Cash Flow(DCF)
PV =
T
X
t=1
I
Ct
(1 + r
Introduction
The recent news about Volkswagen AGs (VW) violation of emission control laws by cheating
the tests led to the 40 percent drop in share price and the $33 billion drop in market value within
one week. This report will discuss the factors that l
FM2557 Chapter 32
Todays plan
Return students paper of Test 1. Note that the
request for a remarking must be made within one
week of the date when the result is announced;
afterward the result will be considered finalized.
Overview of test 1
Finish Ch
FM2557 Chapter 25
Textbook coverage: Sections 2.4 2.6
Todays Learning objectives
Finish chapter 2
Discuss more on long v.s. short
Discuss how to compare different investment
strategies
Introduce the concept of financial engineering
Summarize and
Friends: S02E21
Monica wanted to buy a stock
MONICA: Hey, I went up.
RACHEL: What?
MONICA: My stock, MEG, it went up 2 points. Hey guys, do
you realize that if I had invested my $127 in myself yesterday
that I'd like have.a lot more than that today. Ya
Solution to selected questions in Chapter 5
Ex5.2, 5.10 (even), ex5.12 5.15, and ex5.17
Question 5.2
a) The owner of the stock is entitled to receive dividends. As we will get the stock only
in one year, the value of the prepaid forward contract is today
Solutions to the Selected Questions in Chapter 8
Question 8.2
a) We first solve for the present value of the cost per three barrels, based on the forward
prices:
+
$20
1.06
+
$21
(1.065) 2
$22
(1.07)3
= 55.3413.
We then obtain the swap price per barrel by
Solutions to Selected Questions in Chapter 7
Question 7.3
Using the bond valuation formulas (7.1), (7.3), (7.6) we obtain the following yields and
prices:
ZeroCoupon
Bond Yield
ZeroCoupon
Bond Price
OneYear
Implied Forward
Rate
Par
Coupon
Cont. Comp.
Z
Solutions to Problem Set 3
3.2 Let ST be the spot price of the S&R Index at T . The payo of the short index and short put
position is
ST
if ST > 1000
f (ST ) = ST (1000 ST )+ =
.
1000 if ST 1000
The cost plus interest for this position is
(1000 + 74.201)
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PM 25 95/4. $5 055; mama
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:32 \ Exhibit A: Price on November I; 2014 of U.S. Treasury $15000 principal strips With maturity
dates 120 years hence.
L l Implied 1 Year
' Price of $1,000 Implied "X"
3 1
Ch2 continued
Shortcuts in calculating PV
Perpetuities and Annuities
Growing Perpetuities and Annuities
Compound Interest & Present Values
Present Values
Recall that
C1
PV DF C1
1 r1
r1 is the opportunity cost of capital when investing
your mo
2 (12 Marks)
(a) Briey describe what it meant by short selling. [2 points]
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1. (13 Points)
(a) What is the difference between hedging and speculation? [4 points]
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