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- You happen to be checking the newspaper and notice an arbitrage opportunity. The current stock price of Intrawest is $25 per share and the one-year risk-free interest rate is 3%. A one-year put on Intrawest with a strike price of $23 sells for $3.15, while the identical call sells for $6.13. Explain what you must do to exploit this arbitrage opportunity. (Select the best choice below.) OA. The strategy would be to sell the call option, buy the put and the stock, and borrow $22.33. The net benefit is $0.31. OB. The strategy would be to sell the call option, buy the put and the stock, and borrow $23. The net benefit is $0.31. OC. The strategy would be to sell the call option, buy the put and the stock, and borrow $22.33. The net benefit is $0.98. OD. The strategy would be to buy the call option, sell the put and the stock, and borrow $22.33. The net benefit is $0.31.You are holding $20 million in stocks in 20 large companies. You predict that the Dollar is likely to fall over the next 6 months because of the monetary policy statements of the Federal bank. You need a currency strategy that will be beneficial if your prediction is correct but will not lead to large losses if you are incorrect. Discuss the merits of using either an option or a futures contract to achieve your aims.Suppose a new and more liberal Congress and administration are elected. Their first orderof business is to take away the independence of the Federal Reserve System and to forcethe Fed to greatly expand the money supply. What effect will this have:a. On the level and slope of the yield curve immediately after the announcement?b. On the level and slope of the yield curve that would exist 2 or 3 years in the future?
- You are the financial manager of a construction company that wants to reduce the volatility of its cash flows by making its cash flows less sensitive to changes in the price of concrete. It will do so by buying a call option on the Invesco Materials ETF with a strike price of $65 and buying a put option on the ETF with a strike price of $55. Both options are European and expire in 3 months.This option strategy protects you from ___ .Suppose 3 months from now the materials ETF trades at $50. What is the payoff of this option strategy?Suppose we replace all the options with identical European options that expire in 1 year. We would expect that the cost of this new option portfolio to be ___Bruce Honiball's Invention It was another disappointing year for Bruce Honiball, the manager of retail services at the Gibb River Bank. Sure, the retail side of Gibb River was making money, but it didn't grow at all in 2009. Gibb River had plenty of loyal depositors, but few new ones. Bruce had to figure out some new product or financial service-something that would generate some excitement and attention. Bruce had been musing on one idea for some time. How about making it easy and safe for Gibb River's customers to put money in the stock market? How about giving them the upside of investing in equities-at least some of the upside-but none of the downside?You are a market analyst for JP Morgan. Typically, your job is to analyze current trends in various economic markets and inform the bond traders what their future course of action should be. When conducting some research, you discover that in the real estate sector planned aggregate expenditure has consistently been in excess of aggregate output for the last year. In addition, you discover this has also been the case in the oil refining industry. please select an industry to most heavily promote to the bond traders and justify your decision. Support your position with two points. These positions can be either theoretical and/or empirical in nature. An exceptionally good answer would incorporate the recent events that have occurred in the global oil market.
- Joey's bar has been the only bar in town for many years. There is a new bar opening next month. Which one of the following financial risks is Joey's bar exposed to in this scenario? a. Exchange rate risk b. Swap risk c. Price risk d. Counterparty riskYou have been working as a treasurer at Citibank for the past five years and have previously used swaps, futures, and forward contracts to mitigate risk. However, you have never used options so you are interested in exploring the market. You want to start with small transactions and are considering purchasing a European put on a share for $3. The stock is 42 and the strike price is $40. Furthermore, you are also considering purchasing a call option with the same terms as the put option. Consider the following question: Under what circumstances does the investor make a profit? Under what circumstances will the options be exercised? Draw diagrams showing the variation of the investor’s profit.Suppose a new Congress and administration overrule the independence of the Federal Reserve System and force the Fed to greatly expand the money supply. What effect will this have? On the level and slope of the yield curve immediately after the announcement? On the level and slope of the yield curve that would exist two to three years in the future?
- Suppose you live in the Fama-French three-factor model world. Goldman Sachs is selling two derivative securities to your company. Both will pay 100 million dollars over a 10 year period. Assume time value of money is zero. Security A will pay out cash that is positively correlated with economic indicators, thus paying out more when economy is booming and less when economy is tanking. Security B will pay out cash that is negatively correlated with economic indicators, thus paying out more when economy is tanking and less when economy is booming. What should be the fair valuation of these two securities at the start of this 10 year period. A<100 million; B>100 million A=B Both are smaller than 100 million and A<B Both securities should be priced lower than 100 millions. But A>B2. A fund manager is expecting a surge in Turkey's stock market in a month and wants to invest $ 10 million. However, because he doesn't sure about USD/TRY exchange rate's direction, he doesn't want to take exchange rate risk. In order to clear away the exchange risk, he decides to use forward swap. On the other hand, a Turkish bank is expecting a depreciation on USD/TRY at the end of the month and agreed with the fund for a swap contract. Spot Exchange Rate Today 18.10-18.50 Swap Points 70/90(30 days) Based on quotation information above, what is the swap exchange rate? USD/TRY a) 18.90 TRY b)19 TRY 3 Whi c) 19.40 TRY d) 20 TRY15) Flight-to-safety, is a financial market phenomenon occurring when investors sell what they perceive to be higher-risk investments and purchase safer investments, such as gold and US treasury bonds (Wikipedia). When you heard Wuhan was locked down on Jan 22, 2020 (the first city in China being locked down), in fear of the spreading out the fatal virus, you decide to purchase 10-year US treasury note. YTM of available 10-year US treasury note was around 1.70% (annualized rate), with coupon rate of 1.12% (annualized rate). Coupon is paid every 6 months. 6 months later the YTM of the same bond drops to 0.64% (right before the first coupon payment). Assuming the maturity date of the bond you invested is Jan 22, 2030. With the information above, please answer the following four questions. Q:What is the bond price when you invested? (hint: calculate half-year discount rate and coupon payment first. Face value of US 10-year treasury note is $1000.)