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business
fundamentals of investments valuation

Questions and Answers of Fundamentals Of Investments Valuation

Assign the following investments to the right column: Investment You buy a cleaning machine. An extensive survey to explore consumers' habits is ordered. The company uses excess liquidity to buy
Go back to Section 1.2, where the foundation of the car sharing company is described.a) Develop the opening balance sheet for the car sharing company.b) Suppose the purchase of a vehicle costing €
Assign the following business transactions to the right column: Business transaction A loan is taken out by the house bank. A new car is bought. An existing vehicle is replaced by a technically
????• Understand the two steps of the investment process ????• Grasp the risk-return trade-off all investors face ????• See how investors apply the investment process ????• See the
11. Why would it not be a bad idea to start thinking about starting your own microbrewery(to brew your own beer and sell it for profit) when you have other traditional investments? Hint: Think of the
. REITs are listed and traded on exchanges and also nontraded. What could be some of the risks of investing in nontraded REITs?
. How important is an accurate weather forecast?25
b. How can an investor benefit from such instruments?
a. Who would buy a weather derivative and why?
One problem with such financial products is that they are difficult to price because the underlying asset, the weather, is intangible and nontradable.Now answer the questions below. (For more details
9. In 1997, the first weather derivative was created in the United States. Weather derivatives are simply financial instruments used to control unanticipated (adverse)weather conditions (such as
Do you think this would be a good idea as an alternative investment? Hint: Think of the answer in terms of population growth.
8. Suppose a friend of yours who is already in the investments area approached you and suggested that you invest in cultivable land in other parts of the world.
What are some of the potential risks for infrastructure service providers?
How will governments be able to pay for such infrastructure repairs and/or improvements?
7. In the United States and many economies around the world, highways, bridges, schools, and hospitals, to name a few, are in bad shape and in need to urgent, significant repairs.
c. Can you think of any logistical problems that might arise in paying dividends in gold rather than in currency?
b. Why do critics raise concerns about this practice? Hint: Think of the answer in terms of the demand for currencies like the US dollar and the euro.
a. Do you think that metal is now becoming an alternative investment vehicle?
Besides, some hedge funds have already allowed investors to denominate holdings in gold and exchange-traded funds backed by physical gold. Although investors like the idea of receiving gold coins as
6. We read lately in the financial press that some mining companies will begin paying dividends in gold or silver and not cash. Some companies exchanged US dollars into metal in order to mint 1 troy
what is your benefit for entering the swap?
5. Assume that you purchase a $100 million 7.65% par value 5-year bond of a BBBrated company and simultaneously enter into a 5-year interest-rate swap withyour bank. You agree to make fixed
4. What are credit default swaps and what are their benefits?
b. If you find the cross-exchange rate to be 1.109, can you make profits by applying triangular arbitrage? Show your calculations. Assume that you invest $10,000.
a. What is the cross-exchange rate?
3. Assume that the euro/US dollar exchange rate is currently $1.40 and the British pound/US dollar exchange rate is $1.55.
2. What is carry trade and what are the risks of such an investment strategy?
1. What is the difference between a covered and an uncovered interest parity?
Describe some important alternative investment assets
Understand what credit derivatives are and their various types ????
Explain and use two important international parities and strategies ????
d. What impact did these factors have on wheat futures prices?
. What impact did the announcement have on financial and commodity futures?
. What impact did that have on gasoline futures prices?
a. What impact did that have on natural gas futures prices?
in the equity market, bearish global demand/supply fundamentals, and sluggish export demand for wheat were reported during the month of November 2011.
On Wednesday, November 30, 2011, the world’s five major central banks (the Fed, European Central Bank, and Banks of Canada, Japan, and Switzerland) announced a coordinated action to seriously
Crude oil prices flirted with $100 per barrel during the last few days of November 2011. They ended up higher for November 30, 2011.
On Thursday, December 1, 2011, the US Energy Department’s Energy Information Administration announced that natural gas in storage (or the nation’s supplies)shrank.
12. Below are several pieces of news regarding the commodity and financial futures markets. After reading them, answer the questions that follow.
. Assume that the September contract rose to $2.52 and that of December to$2.59. What would this new situation do to your futures position?
a. What would you do if you turned out to be right?
11. Assume that the September futures price of wheat is $2.50 per bushel and the December price is $2.55. You expect the positive price differential to widen in the next few months.
10. World oil prices (and futures both in Europe and New York) soared, mirroring the performance of global equities and a somewhat weaker US dollar. Can you explain this inverse relationship between
9. Currently (as of the third quarter of 2011), there are renewed concerns that the United States and Europe will plunge into a second slowdown, which would reduce the demand for industrial metals
8. The passage below is from the financial press: “Oil rose for a second day in New York on speculation that European governments will resolve their sovereign debt crisis, moderating the region’s
7. Which factors determine the price of financial futures contracts? What is the impact of the opportunity cost?
6. Following the above problem, what would be the implications if the spot and futures prices were not equal?
would be the price 6 months from now? Finally, if the asset paid a dividend yield of 1%, what would be its futures price a year from now? The cost of carry in the first two cases is 3%.
What is the asset’s forward price for delivery a year from now, F1 0? What
Assume that the asset is not a dividend-paying stock and does not incur any storage costs.
5. Assume that the spot price of an asset is $40 and the annual risk-free rate is 2%.
4. How can the clearinghouse protect itself from sustained losses of either party on a futures contract?
Assume that the price of corn per bushel goes up to $4 and then falls to $3.10.
What are the possible dangers (losses) for the clearinghouse in the event of refusals by either party to fulfill his obligations?
3. Assume that H wishes to purchase one contract of corn from N, a seller of corn.He buys a contract (of 5,000 bushels), which trades on the first day of June at$3.68. The value of the contract is
b. Can you find any benefits to trading in such futures?
a. Why do you think there is opposition to the creation of a futures market for movies?
Moreover, some feared that manipulation by movie executives and cinema chain owners could tarnish the movie market.
The box-office futures prohibition is a response to recent efforts to create exchanges that would allow studios and speculators to hedge or wager on the risks of Hollywood releases.
By contrast, the US Senate has put a ban on such trading in its latest effort of financial reform and regulation. The Senate considers this as another gambling platform.
The Commodity Futures Trading Commission has recently (2010) voted to approve futures based on cinema box-office receipts. The reasoning behind their approval was that a film’s domestic box-office
. The passage below is from the financial press.
1. Give an intuitive explanation of why spot and futures prices must be equal. What would be the implications if they were not?
Tell what a futures contract is and why it is used ???? Understand the functions and characteristics of the futures markets ???? Recognize and use the relationship between spot and futures prices
12. How do institutional and retail investors take positions on indexes and/or options on ETFs to hedge against adverse market movements?????
11. After you have read the box titled International Focus, answer the two questions below. What are the uses of options in various markets and why? Why does volatility boost option exchanges?
Compute the hedge ratio and interpret its meaning.
10. You are given the following information on a stock: two possible stock prices at year end, Sup = $100, Sdown = $80; exercise price, $90; call option values, Cup = $10, Cdown = $0.
9. Based on the information below, compute the Black-Scholes-Merton formula (assume a no-dividend paying stock): S0 = $70, X = $60, r = 0.025, T = 0.50 (half a year), = 0.60. What is the call
Price, $60; strike price, $55; call price, $5; put price, $4; risk-free rate, 2.5%; period, 6 months
8. Given the following data, determine if the put-call parity holds and explain your result.
The exercise price is $55, the premium on the call option is $2.50, and the expiration date is in 3 months.What would be the profit/loss situation if the strategy is used based on the following
7. Assume that you purchased shares of ABC stock at $50 per share with the intention of selling them in 3 months. You consider applying the covered call-writing strategy to hedge (somewhat) your
6. Assume that you want to profit from either movement of the market on a stock as long as the movement is high enough to cover your costs of entering these option contracts. Which strategy would you
c. Stock price is unchanged (call expires worthless and shares are owned)
b. Stock price declines (call expires worthless and shares are owned)
a. Stock price increases (call is exercised and stock shares are sold at strike price)
5. Compare the profit/loss situations between going long on (i.e., owning) a stock and having a covered call strategy under the three market scenarios below.
IBMFA.X call and IBMRA.X put. Assume also that the current 3-month Treasurybill rate is 0.25%. Explain your result. Hint: Use 1/12 months or 0.0833 for T in the equation.
4. Using the information in problem 3, compute the put-call parity equation for the
f. What are the out-of-the-money call and put premiums?
e. Define the following: the in-the-money call, the put options call, and put premiums.Hints: Call premium = option price−(stock price−strike price); use the last-column prices.
3. Assume the following real information on IBM calls and puts as of May 29, 2009(from Yahoo! Finance). For example, the symbol IBMFA.X is the IBM 105.00 call for June 2009. The IBM price was
Intrinsic value and/or significant time value?
Google hopes that the plan will “close the gap between the option value at grant and the employee’s perception of the value,” according to the company’s executive compensation manager. The
2. Read the passage below and answer the question that follows.
b. Regarding the second sentence: what does this mean for the option?
a. Regarding the first sentence: if the employee exercises the option, he or she will realize what? (That is, complete the sentence.)
1. Read the passage below and answer the two questions that follow.Currently a Google employee holding an option with a strike price of $450, compared with the market price of $500, can realize only
Describe some options strategies ???? Use the binomial and the Black-Scholes option valuation models ???? Employ stock options
Explain how the options markets operate ???? Distinguish between a call and a put option ????
d. Now assume an even 200-basis point increase in yields. Which portfolio would fare better?????
c. If yields decrease by 50 basis points across all maturities, what would be the portfolio’s average rate of return? Compare the bullet and barbell portfolios’yields after the yield change.
b. If yields increase by 50 basis points across all maturities, what would be the portfolio’s average rate of return? Compare the bullet and barbell portfolios’yields after the yield change.
Compute the portfolio’s average yield.
12. Consider three bonds: X, Y, and Z. Bond X has a yield of 8% and a maturity of 5 years; it can be held in one portfolio, called a bullet portfolio. Bonds Y and Z have 3 and 8 years to maturity and
11. Assume that you have invested 60% of your $30,000 in stocks and the rest in bonds. One year later you observe that your stocks rose by 5% while your bonds declined by 3%. How can you restore your
10. Search the financial literature to find articles on bond market efficiency. Do you conclude that the bond market is efficient or not? Comment.

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