Lecture 9: Options Pricing Theory
Options Pricing Theory
Two Option Valuation Methods
Binomial and Continuous-time Models
The Black-Scholes Model
Option Pricing with Dividends
Based on Chapter 21 in BMA
FM212
Principles of Corporate Finance
Risk Adjus
AC212
Principles of Finance
Exam Answers
1 a-c see attached spreadsheet d: The analysis in part c requires that semistrong form efficiency holds so that the publicly available information is fully
and correctly impounded in stock price. It requires that s
FM212 Class Assignments (Michaelmas Term 2014)
Each class assignment in Part 1 consists of 3 questions. Students should attempt written answers
to the questions before the respective class.
Class 1
1. A parcel of land costs $500,000. For an additional $80
FM212 Class Assignments (Michaelmas Term 2014)
Hand in Problem Set 2
Please hand a paper copy and Departmental Cover Sheet of your work to your class teacher at the
beginning of class 8 (week 9).
Minicase CAPM
After selling 12.75 million shares in Alibaba
FM212 Class Assignments (Michaelmas Term 2014)
Each class assignment in Part 1 consists of 3 questions. Students should attempt written answers
to the questions before the respective class.
Class 7
19. Which of the following observations appear to indicat
FM212 Class Assignments (Michaelmas Term 2014)
Each class assignment in Part 1 consists of 3 questions. Students should attempt written answers
to the questions before the respective class.
Class 9
25. CH4 trading stock price is $100 and in each 3 month p
Lecture 6: Portfolio Theory
Portfolio Theory and Asset Pricing
Equilibrium
Markowitz Portfolio Theory
Mean Variance Optimization
Role of the CAPM
Evidence regarding CAPM
Some Alternative Theories to CAPM
Based on Chapter 8 in BMA
FM212
Principles of
Summer 2007 examination
AC212/AC492
Principles of Finance
2006/2007 syllabus only not for resit candidates
Instructions to candidates
Time allowed: 3 hours
This paper contains ten questions. Answer four questions. All questions answered
will be given equa
FM212 Class Assignments (Michaelmas Term 2014)
Hand in Problem Set 1
Please hand a paper copy and Departmental Cover Sheet of your work to your class teacher at the
beginning of class 4 (week 5).
Minicase Alibaba
The Chinese e-commerce company Alibaba Gro
FM212 Class Assignments (Michaelmas Term 2014)
Each class assignment in Part 1 consists of 3 questions. Students should attempt written answers
to the questions before the respective class.
Class 8
22. The following table lists prices of options on IBM st
FM212 MT2014 Problem Set Solutions
Class 3
7.
Since dividends are paid quarterly, we can value them as a perpetuity using a quarterly
1
discount rate of (1.15) 4 - 1 = 3.556% then, P=$0.5/0.03556=$14.06.
8.
a. We know that g, the growth rate of dividends
Lecture 5: Risk and Return
Risk and Return
Over a Century of Capital Market History
Measuring Portfolio Risk
Calculating Portfolio Risk
Beta and Unique Risk
Diversification & Value Additivity
Based on Chapter 7 in BMA
FM212
Principles of Corporate Fi
Lecture 7: Market Efficiency
The Six Lessons of Market Efficiency
What is an Efficient Market?
Random Walk
Efficient Market Theory
The Evidence on Market Efficiency
Puzzles and Anomalies
Six Lessons of Market Efficiency
Based on Chapter 13 in BMA
FM
Summer 2009 examination
FM212/FM492
Principles of Finance
LSE 2009/GY999
Page 1 of 15
SECTION A
1
Assume for parts (a) to (f) that the Capital Asset Pricing Model holds. The
market portfolio has an expected return of 5%. Stock As return has a market
beta
FM212 Summer 2012 Solution Sketch
1
Oil Well
(A)
$100 per barrel
(B)
110 = (1.01 + nsc)^2*100 so nsc = 3.88%
(C)
Zero. This risk is uncorrelated with the global economy or market, since
changes in the global economy will not affect the recoverability of o
Company: Home Depot (NASDAQ: HD)
1.a
1.a
1.c
2
2
2
2
2
2
3
3
3
Stock Price on 3/2/2012
No. of shares outstanding
Cost of debt (rd)
Short term debt/ Current Portion of Long Term Debt
Long term debt
7
Current
45.17
1,541,568,000
2.595%
$1,042,000,000
$8,707
Date
Monday, October 07, 2002
Friday, November 01, 2002
#
Thursday, January 02, 2003
#
Monday, March 03, 2003
Tuesday, April 01, 2003
Thursday, May 01, 2003
Monday, June 02, 2003
Tuesday, July 01, 2003
Friday, August 01, 2003
#
#
#
#
Friday, January 02, 2
Lecture 4: Valuing Government Bonds
Valuing Government Bonds
Real and Nominal Rates of Interest
The Term Structure and Yield to Maturity
(YTM)
How Interest Rate Changes Affect Bond
Prices
Explaining the Term Structure
Based on Chapter 3 in BMA
FM212
P
Lecture 10: Forwards and Futures
Forwards and Futures
Hedging with Commodity Forwards
Cash Settlement vs. Delivery
Marking-to-market
Forwards and Futures
Financial Futures Pricing
Commodity Futures Pricing
Differences between Forwards and Futures
B
FM212 MT2014 Problem Set Solutions
Class 2
4.
Annuity with growth:
a. The present value of Mike Polanskis future salary payments can be written as perpetuity
with growth. Let St = salary in year t
30
PV =
t =1
30
=
t =1
St
=
(1.08) t
30
t =1
40,000 (1.05
FM212 Class Assignments (Michaelmas Term 2014)
Each class assignment in Part 1 consists of 3 questions. Students should attempt written answers
to the questions before the respective class.
Class 2
4. Mike Polanski is 30 years of age and his salary next y
Lecture 1: Present Value
Present Value
Introduction to Present Value
Foundations of the Net Present Value Rule
Based on Chapter 2 in BMA
FM212
Principles of Corporate Finance
Values and Discounting
Discount Rate
Interest rate used to compute present
val
The London School of Economics and Political Science
Department of Finance
FM212: Principles of Finance
Lecturers:
Professor Christopher Polk
Professor Richard Payne
Administration:
Student Information Centre, OLD3.06
Course Web-site
FM212: Principles of
FM212 Class Assignments (Michaelmas Term 2014)
Each class assignment in Part 1 consists of 3 questions. Students should attempt written answers
to the questions before the respective class.
Class 10
28. Yesterday you sold six-month futures on the German D
FM212 Class Assignments (Michaelmas Term 2014)
Each class assignment in Part 1 consists of 3 questions. Students should attempt written answers
to the questions before the respective class.
Class 5
13. Answer the following questions:
a. Briefly explain th
FM212 Class Assignments (Michaelmas Term 2014)
Each class assignment in Part 1 consists of 3 questions. Students should attempt written answers
to the questions before the respective class.
Class 6
16. The Treasury bill rate is 4 percent, and the expected
FM212 Class Assignments (Michaelmas Term 2014)
Each class assignment in Part 1 consists of 3 questions. Students should attempt written answers
to the questions before the respective class.
Class 4
10. You have estimated spot rates as follows:
Year
1
2
3