My company sells products that are a complement to the products sold by Grapefruit Electronics. When Grapefruit Electronics does well, sales of our products also increase. If Grapefruit Electronics is publicly traded with options available, what might be some ways to hedge our exposure using those options?
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- Which of the following is not a characteristic of an efficient market? Investors can frequently make profits by predicting asset market prices that are different from intrinsic values. The market value of all securities at any one instant in time fully reflect all available information. Investors act rationally. The forces of demand and supply work to maintain that the security's market price and its intrinsic value are in equilibrium.You own Honeywell stock, and are worried that its price will fall. You are considering "insuring" yourself against this possibility. How can your provide such protection? (Choose the best answer below.) A. To protect against Honeywell's stock price dropping, you can buy a put with Honeywell as the underlying asset. B. To protect against Honeywell's stock price dropping, you can sell a call with Honeywell as the underlying asset. C. To protect against Honeywell's stock price dropping, you can buy a call with Honeywell as the underlying asset. D. To protect against Honeywell's stock price dropping, you can sell a put with Honeywell as the underlying asset.Assume that the efficient market hypothesis holds.Marcos has been recently hired by a brokerage firm andclaims that he now has access to the best market information. However, he is the “new guy,” and no one atthe firm tells him much about the business. Would youexpect Marcos’s clients to be better or worse off thanthe rest of the firm’s clients?
- Which is correct about security valuation? A. In an efficient market, several factors would affect the market and value is not necessarily equals the price. B. The value of the security is determined to compare it with the current market price and usually investor would buy when the value equals the price. C. Sellers would prefer the accept lower bid price than higher bid price to realize gains. D. Investors buy securities when securities are underpriced and sell them when it is overpriced. E. All of the above F. None of the aboveYou believe you have found a trading strategy that could make significant profits. It requires looking at analyst forecasts and purchasing stock where therehas been an upgrade in the recommendation and selling shares where there has been a downgrade in the recommendation.a. Describe which form the Efficient Market Hypothesis will be viola ed if you are able to make significant profits from your trading strategy in the future.b. List three factors that you may be overlooking in assessing the profitability of your trading strategy.Mark thinks that there is an interesting paradox of the efficient market hypothesis. If the market believes that prices reflect all information, investors will stop seeking mispriced securities. This may lead to more mispriced stocks and more inefficiency. However, if the market believes that inefficiency still exists, the competition of trying to be the first to find mispriced securities will make markets more efficient. Do you agree with Mark? Why or why not? Please briefly comment.
- Garcia Real Estate is involved in commercial real estate ventures throughout the United States, Some of these ventures are much riskier than other ventures because of market conditions in different regions of the country. If Garcia does not risk-adjust its discount rate for specific ventures properly, which of the following is likely to occur over time? Check all that apply. The firm could potentially reject projects that provide a higher rate of return than the company should require. The firm will increase in value. The firm's overall risk level will increase. How do managers typically deal with within-firm risk and beta risk when they are evaluating a potential project? Quantitatively O Subjectively Consider the case of another company. Turnkey Printing is evaluating two mutually exclusive projects. They both require a $5 million investment today and have expected NPVS of $1,000,000. Management conducted a full risk analysis of these two projects, and the results are shown below.…A company has recently purchased some stock of a competitor as part of a long-term plan to acquire the competitor. However, it is somewhat concerned that the market price of this stock could decrease over the short run. The company could hedge against the possible decline in the stock’s market price by a. Purchasing a call option on that stock. b. Purchasing a put option on that stock. c. Selling a put option on that stock. d. Obtaining a warrant option on that stock.Since IBM (technology), RJR (tobacco) and Kellogg (consumer goods/cereal) are in very different industries with very different risks, they each have a unique market risk premium when using the CAPM. Group of answer choices True False
- WSP Inc. is involved in a wide range of unrelated projects. The company will pursue any project that it thinks will create value for its stockholders. Consequently, the risk level of the company's projects tends to vary a great deal from project to project. If WSP Inc. does not risk-adjust its discount rate for specific projects properly, which of the following is likely to occur over time? Check all that apply. The firm will become more valuable. The firm's overall risk level will increase. The firm could potentially reject projects that provide a higher rate of return than the company requires. Generally, a positive correlation exists between a project's returns and the returns on the firm's other assets. If this correlation is risk will be a good proxy for within-firm risk. Consider the case of another company: □ Chrome Printing is evaluating two mutually exclusive projects. They both require a $1 million investment today and have expected NPVS of $200,000. Management conducted a…Which of the following statements is FALSE? When a buyer seeks to buy a stock, the willingness of other parties to sell the same stock suggests that they value the stock differently. O When private information is relegated to the hands of a relatively small number of investors, these investors may be able to profit by trading on their information. Since stock markets aggregate the information and views of many different investors, we expect the stock price to react quickly to new publicly available information as the investors continue to trade until a consensus is reached as to the new value of the stock. If the profit opportunities from having private expertise are large, other individuals will attempt to gain the expertise and devote at least as large amount of resources needed to acquire it.Which strategy would be best for Kelly to deploy if she thinks the stock market will decline and she wants to protect the downside, while maintaining any upside if she is wrong about the market situation: a Protective puts b Covered calls c Zero-cost collars