Money Banking And The Financial System 1st Edition R Glenn Hubbard ,Anthony Patrick O'Brien - Solutions

Suppose that the Dow Jones Industrial Average is above the 10,000 level. If the Dow were to fall to 6,000, who would gain the most: investors who had bought call options, investors who had sold call
The following appeared in an article in the Wall Street Journal:Credit Suisse Group equity-derivatives strategist Sveinn Palsson suggests a “strangle” in the company’s options. The strategy
An article in the Wall Street Journal contains the following:Options traders were quick to take positions in retail companies Friday. . . . Target Corp.was among the active names in the sector, with
An article in a financial publication observes:“The higher the expected volatility in stock prices, the higher the prices of put and call options will be.” Briefly explain the reasoning behind
[Related to the Making the Connection on page 204 and Solved Problem 7.4 on page 205]Use the following information on call and put options for IBM to answer the questions.a. What is the intrinsic
In late April 2010, Apple’s stock was selling for more than $260 per share. The following appeared in a column in the Wall Street Journal,listing potential problems facing Apple that might cause
A video posted to the Wall Street Journal’s Web site in mid-2010 was titled “Equities May Have Rallied Too Much, Buy Puts.”a. What are equities?b. What does it mean that “equities may have
Why might someone buy an option on a futures contract derived from an underlying asset rather than buy an option on the underlying asset itself?
How can investors use options to manage risk?
What is the Black-Scholes model? Who are the quants?
What is an option premium? What is an option’s intrinsic value? What other factors, besides intrinsic value, can affect the size of an option premium?
How do the rights and obligations of options buyers and sellers differ from the rights and obligations of futures buyers and sellers?
Define each of the following:a. Call optionb. Put optionc. Strike priced. Expiration date
According to an article in the Economist magazine:In 1958 American onion farmers, blaming speculators for the volatility of their crops’prices, lobbied a congressman from Michigan named Gerald Ford
The Chicago Mercantile Exchange offers a futures contract on the S&P 500:The size of a CME S&P 500® futures contract is the contract’s multiplier ($250) times the current CME S&P 500 futures
[Related to Solved Problem 7.3 on page 198]Suppose that you are an investor who owns$10,000 in U.S. Treasury notes.a. Will you be more worried about market interest rates rising or falling? Briefly
[Related to the Making the Connection on page 197] Consider the following listing for 10-year Treasury note futures on the Chicago Board of Trade. One futures contract for Treasury notes = $100,000
[Related to the Making the Connection on page 195] An article in the Wall Street Journal discussing the fear that some farmers had that regulation of derivatives would make it harder for them to
An article in the Wall Street Journal discussing the nickel market contained the following:The sharp rise in nickel prices demonstrates how even a slight shift in demand and supply can roil tiny
Suppose that you are a wheat farmer. Answer the following questions.a. It is September, and you intend to have 50,000 bushels of wheat harvested and ready to sell in November. The current spot market
According to an article in the Wall Street Journal, during the last quarter of 2008, the Walt Disney Company “lost money on a fuel hedge for the company cruise line.” Why would Disney want to
An article in the Wall Street Journal discussing how oil prices tend to rise during the spring observes, “Hedge funds and other speculative traders often hitch a ride on a rally that has become
An article in the Wall Street Journal noted:While other airlines were struggling to stay afloat, Southwest Airlines posted quarter after quarter of positive results as a result of its extensive
An article in the Wall Street Journal quotes a participant in the futures market for oil as saying, “We’ve seen less activity of people buying protection.”a. What is it that people are
According to an article in the Wall Street Journal, Canadian firms that import goods that are priced in U.S. dollars “buy futures contracts that guarantee that they can exchange Canadian dollars
Why did futures markets originate in agricultural markets? Would a farmer buy or sell futures contracts? What would a farmer hope to gain by doing so? Would General Mills buy or sell futures
Define the following: margin account, margin requirement, and marking to market.
Give an example of how someone might hedge using a commodity futures and give an example of how someone might hedge using a financial futures.
What is the difference between the short position and the long position in a futures market?
What is the difference between a commodity future and a financial future? Give two examples of each.
What are the key differences between forward contracts and futures contracts?
What is counterparty risk? What counterparty risk is involved with forward contracts? Why are investors and firms that enter forward contracts willing to accept counterparty risk?
An opinion column in the Wall Street Journal observes: “Speculators earn a profit by absorbing risk that others don’t want. Without speculators, investors would find it difficult to quickly hedge
What is the spot price? What is the settlement date?
What is a forward transaction? What is a forward contract?
In each of the following situations, what risk do you face from price fluctuations? What would have to be true of a derivatives security if the security were to help you to hedge this risk?a. You are
Would derivatives markets be better off if the only people buying and selling derivatives contracts were hedgers? Briefly explain.
Why might a corn farmer want to hedge against volatile corn prices?
What is the difference between hedging and speculating?
What are derivatives?
Define swaps and explain how they can be used to reduce risk (pages 208–212)1. The article mentions that a possible negative consequence of the financial reform bill is “arbitrage between U.S.
Distinguish between call options and put options and explain how they are used (pages 200–208)
Discuss how futures contracts can be used to hedge and to speculate (pages 192–200)
Define forward contracts (pages 191–192)
Explain what derivatives are and distinguish between using them to hedge and using them to speculate (pages 190–191)
Writing in New York magazine, Sheelah Kolhatkar asks an intriguing question:A couple of weeks ago, for instance, the investment-management company Vanguard released data showing that men were more
The British economist John Maynard Keynes once wrote that investors often do not rely on computing expected values when determining which investments to make:Most, probably, of our decisions to do
Former Federal Reserve Chairman Alan Greenspan once argued that it is very difficult to identify bubbles until after they pop. What is a bubble, and why might bubbles be difficult to identify?
Some mutual funds have started behavioral finance funds that attempt to use insights from behavioral finance in choosing stocks. According to an article in the New York Times, “Emotions cause
What is herd behavior, and how can it lead to a bubble in a financial market?
What is noise trading?
What do economists mean when they describe investors as behaving rationally?
What is behavioral finance? How is it related to behavioral economics?
Mutual funds that follow a “momentum trading” strategy are known on Wall Street as“momos.” How might a mutual fund manager use a momentum trading strategy? Why might the fund manager expect
[Related to the Making the Connection on page 176] A columnist in the Economist argues that:The past ten years have dealt a series of blows to efficient-market theory, the idea that asset prices
There is an old saying on Wall Street: “Sell in May and Go Away.” This saying means that stock prices typically do not do well over the summer months. A blogger at the Wall Street Journal
According to an article in the Wall Street Journal, “Cyclical sectors such as tech typically lead in the second year of a bull market, which is on track for the beginning of March.”a. What is a
Why are supporters of the efficient markets hypothesis unconvinced that differences between the theoretical and actual behavior of financial markets actually invalidate the hypothesis?
What is excess volatility? How might an investor use excess volatility to earn above-average returns?
What is mean reversion? How might an investor use mean reversion to earn above-average returns?
What is a pricing anomaly? How might an investor use a pricing anomaly to earn aboveaverage returns?
[Related to the Chapter Opener on page 156]The chapter opener states that “many investors who bought stocks in 2000 and held them through 2010 found that they had received a negative real return on
[Related to Solved Problem 6.3 on page 173]An article in the Wall Street Journal noted that of the thousands of mutual funds investing in stocks or stocks and bonds, only 31 had managed to earn a
The business writer Michael Lewis has quoted Michael Burry, a fund manager, as saying: “I also immediately internalized the idea that no school could teach someone how to be a great investor. If
[Related to the Making the Connection on page 172] Henry Blodget worked for Merrill Lynch during the dot-com boom. The New York attorney general accused Blodget of having praised Internet stocks in
Suppose that Apple’s profits are expected to grow twice as fast as Microsoft’s. Which firm’s stock should be the better investment? Briefly explain.
The following is from a business report by the Reuters news agency: “Online retailer Overstock.com . . . posted a surprise quarterly profit and its shares jumped as much as 34 percent to their
In 2010, Toyota recalled millions of automobiles to fix a potentially hazardous problem known as sudden acceleration. Writing in the Wall Street Journal, James Stewart gave investors the following
An article in the Wall Street Journal makes the following observations:The outlook for companies: robust earnings and revenue growth. Firms in the S&P 500 are expected to report year-over-year
Suppose that you buy an Apple iPad, you like it, and you think it will be a big seller. You expect that Apple’s profits will increase tremendously as a result of booming iPad sales. Should you
According to the efficient markets hypothesis, are stock prices predictable? What is a random walk?
What is the efficient markets hypothesis?
What is the difference between adaptive expectations and rational expectations?
During May 2010, the Dow Jones Industrial Average declined by nearly 8%, its worst performance during May since 1940. Brian Bethune, a financial economist at HIS Global Insight, was quoted as saying:
[Related to Solved Problem 6.2 on page 167]Suppose that Coca-Cola is currently paying a dividend of $1.75 per share, the dividend is expected to grow at a rate of 5% per year, and the rate of return
[Related to the Making the Connection on page 164] A column in the Wall Street Journal observes that “while many people buy stocks in the hope of scoring profits down the road, dividends deliver
Suppose that a friend has started a business selling software. The software is a great hit, and the firm quickly grows large enough to be able to sell stock. Your friend’s firm promises to pay a
Suppose that a company is expected to pay a dividend per share of $20 per year forever. If investors require a 10% rate of return to invest in this stock, what is its price?
Suppose that at the beginning of the year, you buy a share of IBM stock for $120. If during the year you receive a dividend of $2.50 and IBM stock is selling for $130 at the end of year, what was
Suppose that the price of Goldman Sachs stock is currently $142 per share. You expect that the firm will pay a dividend of $1.40 per share at the end of the year, at which time you expect that the
Write the equation for the Gordon growth model. What key assumption does the Gordon growth model make?
What is the fundamental value of a share of stock?
In words and symbols, write the two components of the rate of return on a stock investment.
What is the required return on equities? What is the relationship between the required return on equities and the cost of equity capital?
What is the relationship between the price of a financial asset and the payments investors will receive from owning that asset?
[Related to the Making the Connection on page 161] Ulrike Malmendier and Stefan Nagel have shown that investors’ willingness to participate in the stock market is affected by the returns they have
An article on investor Warren Buffett makes the following observation:During the financial crisis of last year, Mr.Buffett spent $14.5 billion to buy preferred shares of three blue-chip American
A student remarks: “135,000,000 shares of General Electric were sold yesterday on the New York Stock Exchange, at an average price of $15 per share. That means General Electric just received a
A student makes the following observation:“The Dow Jones Industrial Average currently has a value of 10,900, while the S&P 500 has a value of 1,200. Therefore, the prices of the stocks in the DJIA
How do fluctuations in stock prices affect the economy?
What are the three most important stock market indexes?
What is a publicly traded company? What is the difference between a stock exchange and an over-the-counter market?
In what ways are dividends similar to coupons on bonds? In what ways are dividends different from coupons on bonds?
Define each of the following:a. Preferred stockb. Dividendc. Market capitalizationd. Limited liability
Why is limited liability important to investors who purchase stock?
Why are stocks called “equities”? Are bonds also equities?
Discuss the basic concepts of behavioral finance (pages 177–179)
Discuss the actual efficiency of financial markets (pages 174–177)
Explain the connection between the assumption of rational expectations and the efficient markets hypothesis (pages 168–174)
Explain how stock prices are determined(pages 163–168)

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Money Banking And The Financial System 1st Edition R Glenn Hubbard ,Anthony Patrick O'Brien - Solutions

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