Name:
Q #1. (. points) A stock sells for $110. A call on the stock has an exercise price of $105 and expires in
150 days. The annual interest rate is 11% (or 0.1 1) and the annual standard deviation (0) of the stocks
returns is 0.25. The stock does not pa
Collar Strategy for Hedging Risk
Equity collars are used by investors, such as corporate insiders and managers of nondiversified
portfolios, whose primary concern is the downside risk of a stock position. Collars may be of special
interest to those inves
Quiz #1, _ Q _ Spring 2017
Total points = , ' Name: Keg
Q#1. JetBlue Airlines will purchase 6 million gallons of jet fuel in six months and would like to
hedge the risk of higher jet fuel prices using heating oil futures. The estimated standard deviation
American Barrick Resources Corporation: Managing Gold Price Risk
American Barrick Resources Corporation (ABX) was one of the worlds largest goldmining firm in
1992. This case illustrates the use of financial engineering tools to manage gold price risk by
CORPORATE FINANCIAL POLICY
BUS 135, SPRING 2017
CASE PRESENTATION, REBUTTAL, AND WRITEUP GUIDELINES
The class will be divided into seven groups or teams. Presentations and rebuttal will be a team effort.
However, the case writeups must be done independe
Applications of BlackScholesMerton Model for Pricing European Options
The BlackScholesMertons model can be used directly to price the following European options.
1. Options on dividend and nondividend paying stocks
C = e(T) S N(d1)  e(rT) X N(d2)
so + no +0
Futures price
500 T)(l + C)
Time
Models of futures prices 91
TablcSIl " Anlllustrauo o .noarblill g. . . ,4
Prices for the analysis Spot price of gold $400
Interest rate (borrowing) 12%
Interest rate (lending) 8%
Transaction cost
BlackScholesMerton Option Pricing Formula
C = S N(d1)  e(rT) X N(d2)
(1)
d1=cfw_[ln(S/X)+(r+(2/2)T]/(T)
d2= d1 T
where
C= value (premium) of the call option
S= current stock price
X= exercise price or strike price of the call option (K)
r= riskfree
Terminology for Futures Markets
Basis = current spot/cash price  futures price (nearby contract)
The basis should be zero at the expiration date (T) of the futures contract to prevent
arbitrage profits (i.e., futures price at T= Spot price at T). There i
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JESS, Qo> 3E #85
Q .x 5.9
Trading Strategies
Involving Options
Chapter 11
Fundamentals of Futures and Options Markets, 9th Ed, Ch 11, Copyright John C. Hull 2016
1
Strategies to be Considered
Bond
plus option to create principal
protected note
Stock plus option
Two or more opti
Table for N (x) When x 2 0
c This table shows values of N(x) for x 2 0. The table should be used with interpolation. For example,
N(O.6278) = N(0.62) + 0.78[N(0.63) N(0.62)]
. = 0.7324 + 0.78 x (0.7357 0.7324)
'5 : 0.7350
x .00 .01 .02 .03 .04 .05 .06 .0
Profit Table for a Bullish Call Spread
20 Current Stock Price = 40
Current Option Price = 7.0 (Call 35)
2.0 (Call 45)
15
10
Net Prot
0
Stock Price at Expiration

Stock Price at I I I I I I I I
Expiration 25 3O 35 40 45 50 55 60
Buy 1 M
22; 35 
Quiz #2, BUS 135, Spring 2017
Name: \Ceva'
Q#l (14 points). On March 21, 2015, you purchased 5,000 shares of ABC company at $12 per
share. You plan to sell your shares on December 21, 2017 and are concerned about realizing low
prots and downside risk. A p
EXHIBIT 3.5
Free: TeeIe fer e Ce ireree CeII Oetr'en
3'3 Current Sleek Price = 40
Current Cetien Price = 4t]
15
1D
E
it. D
E ,
2 Stcclt Price et Expiretien
_5 1":
1Et
E
u:
Steelt Price at I 'I I I I I I I
Expueen 25 30 35 4Q 45 5E 55 EC
Eur
Steer.
I_
Two US. Economists Win Nobel Prize
j!
Merton and Scholes Share
Award for Breakthrough
In Pricing Stock Options
By MICHAEL M. PHILLIPS
Staff Reporter of THE WALL STREET JOURNAL
Two economists with close ties to Wall
Street. Robert C. Merton and Myro
Hedging Strategies Using
Futures
Chapter 3
Fundamentals of Futures and Options Markets, 9th Ed, Ch3, Copyright John C. Hull 2016
1
Long & Short Hedges
A
long futures hedge is appropriate when
you know you will purchase an asset in
the future and want to l
Hedging
Hedger
A trader who enters the futures market in order to reduce a preexisting risk.
Hedging Horizon
The future date when the hedge will terminate.
A Short Hedge
Sell or write a futures contract.
Some situations for doing a short hedge
1. The firm
Hedging the Spot Market Risk Exposure Using Futures
1. Minimumvariance hedge ratio= h*= () (S/F) = (Average change in S)/(Average change in F)
= Correlation between S and F; S = standard deviation of change in S (S); F= stan. dev. of F
Linear Regression
Chapter 2
Terminology of Futures Contracts
Tick size:
Minimum price fluctuations
Daily price limit:
Maximum price fluctuations allowed in a single day
Daily limits are not in effect during the delivery months; price limits expanded
over successive days du
Stock Valuation and Capital Gain and Dividend Yield estimations.
D
R
Super g Constantg
T
$1
12%
30%
5%
D
1/(1+r)^t
PV(D)
0
$1
1
2
3
4
5
$1.30
$1.69
$2.20
$2.86
$3.71
Estimation Price at t=1
1
$1.69
2
$2.20
3
$2.86
4
$3.71
0.892857
0.797194
0.71178
0.63551
Chapter 6 NPV versus its Competitors
Example: Net Present Value
The Alpha Corporation is considering investing in a riskless project costing $100. The project receives $107 in one year and has no other cash flows. The discount rate is 6 percent. NPV
Chapter 152 Capital Structure with Taxes
6. Corporate Taxes and Capital Structure Interest is deductible from corporate taxes, dividends are not deductible Example: Company is considering two ways of financing a project that generates $1,000,000 in
Chapter 151 Capital Structure in a Perfect World
The CapitalStructure Question The value of a firm is defined to be the sum of the value of the firm's debt and the firm's equity.
V=D+E
70% 30% 25%50% DebtDebt Equity
The Capital Structure decisio
Chapter 17  Financing and Valuation
1. Optimal Financing Choices Lectures up to this point have focused on financial choices that maximize firm (or equity) value Managers tend to think about financial choices that lower their cost of capital
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