Question
1.The risk-free interest rate in the USA is expected to be 3% and the risk-free interest rate in Mexico is expected to be 7% over
1.The risk-free interest rate in the USA is expected to be 3% and the risk-free interest rate in Mexico is expected to be 7% over the next three years. If the current spot exchange rate is 20 Mexican pesos per dollar, what is the expected future exchange rate in pesos per dollar in three years according to Interest Rate Parity (IRP)?
2. Consider an unleveraged company worth $150 million. The average investor in the company faces a 15% tax rate on equity investments and a 40% tax rate on debt investments? If debt of $50 million is borrowed and invested by the company and the company faces a 40% corporate tax rate, what is the new value of the company?
3. Consider a call option with a strike price (X) of $100 that expires in six month (t=0.5). If the current stock price (S) is $100, the underlyings stocks volatility () of the stock is 0.2, and the risk free rate (rrf) is 5% what is N(d1)? The Excel NORMSDIST(z) function will be helpful for this problem.
4. According to the Black-Scholes asset pricing model, what is the value of a call option, if N(d1) = 0.7, N(d2)=0.6, the underlying stock has a current price (S) of $50, the options strike price (X) is $50, the risk free rate (rrf) is 5%, and the option expires in 1 year (t=1)?
Please pick the ones you can solve
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started