Econ assignment.
19. Corsider two economies: the home country is Norway {currency is the Krone]. and the foreign country is the US. State the Uncovered Interest Parity condition, assuming that the default risk is identical between the two countries. For each of the scenarios discLssed below. assume that initially the U3 and Norwegian interest rates are identical end that the US interest rate remains unchanged throughout. Scenario 1. The Norwegian interest rate is expected to remain above the U5 rate for one year. What relationship between the interest rate differential and change in the Krone exchange rate would be observed on average during the year\"? Problem 7.26. For all maturities the US dollar (USD) interest rate is 7% per annum and the Australian dollar (AUD) rate is 9% per annum. The current value of the AUD is 0.62 USD. In a swap agreement, a financial institution pays 8% per annum in AUD and receives 4% per annum in USD. The principals in the two currencies are $12 million USD and 20 million AUD. Payments are exchanged every year, with one exchange having just taken place. The swap will last two more years. What is the value of the swap to the financial institution? Assume all interest rates are continuously compounded. The financial institution is long a dollar bond and short a USD bond. The value of the dollar bond (in millions of dollars) isProblem 7.12. Companies A and B face the following interest rates (adjusted for the differential impact of taxes): A B US Dollars (floating rate) LIBOR+0.5% LIBOR+1.0% Canadian dollars (fixed 5.0% 6.5% rate) Assume that A wants to borrow U.S. dollars at a floating rate of interest and B wants to borrow Canadian dollars at a fixed rate of interest. A financial institution is planning to arrange a swap and requires a 50-basis-point spread. If the swap is equally attractive to A and B, what rates of interest will A and B end up paying?b. Now suppose that the consumer wishes to maintain a minimum omsump- tion level of $20.000 in each period of her life. To do so, she must consider the worst outcome. If warnings during the middle age turn out to be $40.000, how much should the consumer spend when she is young to guarantee consumption of at least $20.000 in each period? How does this level of consumption compare to the level you obtained for the young in part a? (7 pts)23) Determine which of the following situations demonstrates evidence that is contrary to the efficient markets hypothesis. (A) A takeover bid for a firm is announced at a higher price than the current market price. The firm's share price then increases sharply upon the announcement. (B) By purchasing stocks with high returns over the past year, investors can earn positive excess returns over the next year. (C) Skilled fund managers earn no excess returns relative to their benchmarks, even before fees and transaction costs are taken into account. (D) In research studies completed several years after a severe market decline, many firms were determined to be overvalued prior to the decline. (E) A firm announces that it will increase its dividend in the future, upon which its stock price increases immediately.40) Several lookback options are written on the same underlying index. They all expire in 3 years. Let S, denote the value at time f of the index on which the option is written. The initial index price, So , is 150. The index price when the option expires, S, , is 200. The maximum index price over the 3-year period is 210. The minimum index price over the 3-year period is 120. Calculate the sum of the payoffs for the following three lookback options: . Standard lookback call . Extrema lookback call with a strike price of 100 . Extrema lookback put with a strike price of 100 (A) 180 (B) 190 (C) 200 (D) 210 (E) 22011:57 P - XO ... OB/s Mil all 1 17% 26. Consider European and American options on a nondividend-paying stock. You are given: (1) All options have the same strike price of 100. (ii) All options expire in six months. (ili) The continuously compounded risk-free interest rate is 10%. You are interested in the graph for the price of an option as a function of the current stock price. In each of the following four charts I-IV, the horizontal axis, S, represents the current stock price, and the vertical axis, . represents the price of an option. 100 95.12 - 100 * $-95.12 160 95.12 IV. 100 95.12 95.12 Match the option with the shaded region in which its graph lies. If there are two or more possibilities, choose the chart with the smallest shaded region. IFM-01-18 Page 49 of 105 European Call American Call European Put American Put (A) III TIT (B) IV (C) III (D) II IV III (E) 11 IV IV 27-30. DELETED 31. You compute the current delta for a 50-60 bull spread with the following
