Under what circumstances would a company need to estimate their inventory?
What are the differences between using the gross profit and retail inventory
method for estimating inventory? Which method of
BRIEF EXERCISE 41
Cash
Net Income
A
$
(100.00) $

B
$
20.00
$
(80.00)
C
$
1,300.00
$
1,220.00
D
$
800.00
$
2,020.00
E
$
(2,500.00) $
(480.00)
F
$
(600.00) $
(1,080.00)
PROBLEM 42A
A)
GENERAL JOURNA
tables gives a 3% yield for all redemption values and prices. Hence we
use table IA: The maximum, indeed only price, is 1261.80. Why? By
Table IB, the buyer may get either 3%, 3.07% or 3.10% depending
you need to synthetically create a forward 21.17 More on cash and
carry Cash and Carry Arbitrage: by definition means an arbitrage that
buys the underlying asset and sells/shorts a forward You use a c
% % OLB8 I 1.0099 OLB8 I 1.00992 OLB8 I 1.00993 OLB8 I 1.00993
1.0075 OLB8 I 1.00993 1.00752 OLB8 I =L2 To understand what is going
on I made a timeline with 4 rows of labels. Notice how Chapter 2 is
different for calls and puts (Since their profit regions are different) If
the current market price would motivate not exercising the option, the
option is OTM 19.10 Why Moneyness Remember in lecture
approach advocated in these notes is powerful 224 CHAPTER 19.
DERIVATIVES  GRAPHING METHODS 19.20 DSQ#15 The current price
of a nondividend paying stock is 40 and the continuously compounded
riskf
EOV for Timeline #2 is: P V2 = Xv1 + Xv2 2 + Xv3 3 262 CHAPTER 22.
SWAPS Here vi , i = 1, 2, 3 is the present value or discount factor The
relationship between vi and ri is given by the following basi
to solve OR we could solve as each equation comes up. That is a matter
of taste. But an important principle of solving many equations in many
unknowns is when each equation gives one more unknown. Sum
is Y (13) Well X = 0.13 0.12 = 0.01 But slope = 10000 = X Y and
hence Y = 10000 0.01 = 100 So Y (0.13) = 100 + Y (0.12) = 289.91
18.23 DSQ#3 Revisited We can now discuss DSQ#3 more thoroughly
Suppo
and that takes time which you have to spend TIP: Use variables not
numbers since it helps you see the pattern. T R I P OLB 0 1000 = L 1 10%
L 10% L 0 1000 2 10% L 10% L 0 1000 10 10% L 10% L 0 1000= L
970.45 is the fair forward rate 21.20 Step 2: Test for Arbitrage Actual
market forward price: 965 Fair forward price: 970.45 Actual market
forward price is lower than the fair forward price Two differ
#2 Fundamental technique: The first 12 payments of 2000 have a value
of at t=0. Similarly the next 12 payments of 2000(1.02) have a present
value at t=12 of We can now factor out of TIMELINE #2 the fa
modified rate of i where 1/(1+i) i=0%.= 1.08/1.08=1 TIMELINE III
0X(t=1)X(t=2)X(t=3).X(t=24) We now
have to find the outstanding balance of TIMELINE II at t=10. We also
need the payments at t=10 an
with 8% annual coupons is bought at a premium to yield an annual
effective rate of 6%. Calculate the interest portion of the 7th coupon.
Figure 1: Text of QIT#10. Text is copyright SOA and reprinted w
issues The last payment is the 8th payment The first payment of the
new loan is at the time of the 9th payment of the old loan The original
loan is in half years while the refinanced loan is in months
important of using examples to see the pattern of cash flows. Timeline
2: This timeline has the interest and principle withdrawn from timeline
1 Timeline 3: This is a standard trick for decreasing cas
an interest swap the t = i value is the expected oneyear forward rate
fi1,i It is sometimes convenient to equivalently use the oneyear
forward rate factor 1 + fi1,i It is instructive to work out why
=95% L 2 150% I 10% 95% L 150% x 10% 95% L 10% 95% L = 5% 95% L
(95%)2 L Exponent 2 = t=2 3 150% I 10%(95%)2 L 5% (95%)2 L (95%)3 L
Exponent 3= t=3 10 (95%)10 L Justified by Pattern of
examples 11 X 1
Solution reflects Dr Hendels approach to these problems This problem
requires 6 timelines and 5 equations of value TIMELINE 1 0100
(t=1)100(t=2)  An exchange is made at t = 5. So we need the the
ou
time different than 0. The recalculation may involve different i,n. It may
also involve conversions. This problem has 3 timelines and 5 equations.
So it affords us an opportunity to review how to appr
equations and unknowns: (2 equations; 1 unknown) Subtract or
divide We can solve for i using the calculator TV Line N I PV PMT FV 20
CPT =4.2 5341.12/400 1 0 i = 8.4%So i/2 = 4.2% QIT#55 Solutions
S
problem It points out that definitionally a swap can refer to any
actuarially equivalent sequence of payments This is true But I feel it
misleading (I dont think the problem is good) The standard use
from now. So we need a discount factor, actually an accumulation
factor. 3) Adding (1) and (2) but subtracting (3), we get 9792.39 +
3525.26  2460.38 = 10857.27. The published SOA solutions noticed a
pay the forward price S0e T e rT Using the concept of a synthetic
long forward we can neatly explain the cash and carry arbitrage In the
pen example, we shorted a pen high and longed a pen low and pro
swap, swap spread, deferred swap, accretizing swap, amortizing swap,
swaption You can get a good idea of their meaning by googling them
We are focusing on the numerical solutions and mathematical met