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Corn call options with a $1.70 strike price (per bushel of corn) are trading for a $0.15 premium. Farmer Jayne decides to sell 20,000 bushels of corn she is going to produce in six months.
If the bond's yield to maturity remains constant, then in one year, will the bond price be higher, lower, or unchanged? Why?
If after 6 months the homeowner experiences a casualty loss valued at $50,000. what is the homeowner's net loss? Assume that the continuously compounded interest rate equals 4.0%.
Which security has a higher effective annual interest rate? A three-month T-bill selling at $97,645 with par value $100,000.
If your homeowner's insurance premium is $1,000 and your deductible is $2000, what could be considered the strike price of the policy if the home has a value of $120,000?
Two basic assumptions of technical analysis are that security prices adjust: Rapidly to new information, and market prices are determined by the interaction between supply and demand.
Assume that the trader from the previous problem decides to borrow from (or invest in) the money-market the cost (or profit) from the above purchase. Suppose that at time T = 1 the value of the asse
An investor purchases a call option with an exercise price of $55 for $2.60. The same investor sells a call on the same asset with an exercise price of $60 for $1.40. At expiration, 3 months later,
Assume that you open a 300-share short position in XYZ common stock at $30.19 with commission of 0.5%. When you close your position the stock price is $29.87 and you have to pay a commission rate of
Which one of the following would provide evidence against the semi strong form of the efficient market theory? About 50% of pension funds outperform the market in any year.
ABC stock has a bid price of $40.95 and an ask price of $41.05. Assume there is a $20 brokerage commission. Suppose that you buy 100 shares, then immediately sell the 100 shares with the bid and ask
Assume that a company announces an unexpectedly large cash dividend to its shareholders. In an efficient market without information leakage, one might expect.
Consider the situation in which stock price movements during the life of a European option are governed by a two-step binomial tree.
Explain the no-arbitrage and risk-neutral valuation approaches to valuing a European option using a one-step binomial tree.
How can a forward contract on a stock with a particular delivery price and delivery date be created from options?
Use put-call parity to relate the initial investment for a bull spread created using calls to the initial investment for a bull spread created using puts.
Which of the following observations would provide evidence against the semi strong? Form of the efficient market theory? Explain.
Call options on a stock are available with strike prices of $15, $17½, and $20, and expiration dates in 3 months. Their prices are $4, $2, and $½, respectively. Explain how the option
Which of the following most appears to contradict the proposition that the stock market is weakly efficient? Explain.
Give an intuitive explanation of why the early exercise of an American put becomes more attractive as the risk-free rate increases and volatility decreases.
Explain why the arguments leading to put-call parity for European options cannot be used to give a similar result for American options.
What is a lower bound for the price of a 4-month call option on a nondividend-paying stock when the stock price is $28, the strike price is $25, and the risk-free interest rate is 8% per annum?
Explain why the market maker's bid-offer spread represents a real cost to options investors.
Explain why an American option is always worth at least as much as its intrinsic value.
Explain why an American option is always worth at least as much as a European option on the same asset with the same strike price and exercise date.