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3- proponents of the Efficient Markets Hypothesis tend to recommend:

a-Technical analysis

b-Earning analysis

c-Passive investing

d-Mutual funds

e-Lucky strike

4- Investors should pursue international investments for the following reasons:

a-Diversification benefits

b-Higher returns due to higher risk

c-Tax savings

d-All of the above

e-Only A and B

5- Top down investment analysis always includes:

a-Company analysis

b-Technical analysis

c-Industry analysis

d-Macroeconomics analysis

e-All of the above

6- which one of the following option strategies is the most risky?

a-Buying a put option

b-Writing a call option

c-Buying a call option

d-Buying a put and call on the same stock

e-Cannot tell without more info

7- computation of a risk-adjusted required return is best accomplished using

a-The dividend discount model

b-The price-earnings ratio

c-The market model beta

d-Momentum

e-Astrology

8- which of the following are both TRUE and evidence of market efficiency?

a-Stock prices seem to anticipate merger outcomes

b-Earnings announcement have no lasting impact on stock prices

c-Stocks exhibit significant price momentum

d-Mutual fund managers tend to outperform market averages

e-Small stocks earn higher returns, on average

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Jean Keeling
Jean KeelingLv2
28 Sep 2019

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The following is a hypothetical stock price of ABC, Inc. for the next 2 years. The company does not pay dividends. Each step represents one year. The current stock price is $400 and the risk-free rate is 4%.

This table is the picture I uploaded!!!

a. Using the tree, calculate the price of a CALL option with a $440 strike price and 2 years to maturity.

b. Using the tree, calculate the price of a PUT option with a $440 strike price and 2 years to maturity.

c. Does the Put-Call Parity hold using your numbers in a and b?

d. Suppose an investment banker changes the term of call options. He adds the following clause: “If the stock price increases higher than $450 before the maturity date of the call option, the call option will be voided immediately and have no value”. What is the value of the call option (K=$440) with this clause?

Thank you!!!

Problem 22-28 Two-State Option Pricing Model

Maverick Manufacturing, Inc., must purchase gold in three months for use in its operations. Maverick’s management has estimated that if the price of gold were to rise above $1,570 per ounce, the firm would go bankrupt. The current price of gold is $1,490 per ounce. The firm’s chief financial officer believes that the price of gold will either rise to $1,685 per ounce or fall to $1,380 per ounce over the next three months. Management wishes to eliminate any risk of the firm going bankrupt. Maverick can borrow and lend at the risk-free EAR of 7.0 percent.

a-1. Should the company buy a call option or a put option on gold?
Put option
Call option

a-2

What strike price would the company like this option to have? (Do not round intermediate calculations.)

Strike price

b.

How much should such an option sell for in the open market? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

Option price $

c.

Suppose no options currently trade on gold. What are the transactions needed to create a synthetic option with identical payoffs to a traded option? (Do not round intermediate calculations and round your final answers to 2 decimal places. (e.g., 32.16))

c-1. (Click to select)BuySell $ shares of stock

c-2. Amount to (Click to select)borrowlend $

d.

How much does the synthetic option cost? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

Synthetic option $

Maverick Manufacturing, Inc., must purchase gold in three months for use in its operations. Maverick’s management has estimated that if the price of gold were to rise above $1,555 per ounce, the firm would go bankrupt. The current price of gold is $1,475 per ounce. The firm’s chief financial officer believes that the price of gold will either rise to $1,655 per ounce or fall to $1,365 per ounce over the next three months. Management wishes to eliminate any risk of the firm going bankrupt. Maverick can borrow and lend at the risk-free EAR of 5.5 percent.

a-1.Should the company buy a call option or a put option on gold?

Call option

Put option

a-2 What strike price would the company like this option to have? (Do not round intermediate calculations.)

Strike price?

b. How much should such an option sell for in the open market? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

Option price $?

c. Suppose no options currently trade on gold. What are the transactions needed to create a synthetic option with identical payoffs to a traded option? (Do not round intermediate calculations and round your final answers to 2 decimal places. (e.g., 32.16))

c-1. $ shares of stock

c-2. Amount to borrow $?

d. How much does the synthetic option cost? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

Synthetic option $

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