Question 3 (Futures and Forward Prices - 20 marks) An investor has just taken a short position in a six-month forward contract on a dividend-paying stock. The stock price is 132.00, and the risk-free rate of interest is 6% per annum with continuous compounding for all maturities. The stock is expected to pay a dividend of 2 per share in two months and in five months.
Required
(a) What are the forward price and the initial value of the forward contract? (2 marks)
(b) Three months later, the price of the stock is $48 and the risk-free rate of interest is still 6% per annum. What are the forward price and the value of the short position in the forward contract? (3 marks)
The risk-free rate of interest is 6% per annum with continuous compounding, and the dividend yield on a stock index is 3.0% per annum. The current value of the index is 500.
Required
(c) What is the six-month futures price? (2 marks)
(d) Assume that the futures price for a contract deliverable in six months is 510. What arbitrage opportunities does this create? (3 marks)
(e) The futures price of gold can be calculated from its spot price and other observable variables whereas the futures price of copper cannot. Discuss why this is the case.
Question 13 Value engineering describes which of the following? A. Using engineering to deliver value to customers B. A group of techniques that is used to examine past decisions and current trade offs in designing alternatives C. A group of techniques used to evaluating engineering alternatives D. All of the above Question 14 In an economic decision making, when the inputs and outputs are fixed, the criterion to use is minimize the input.(TRUE/FALSE)? Question 15 Most engineering projects that have economic consequences have to be justified using economic decision making methods (TRUE/FALSE)? Question 16 In engineering economic cost is a decision making tangible factor.(TRUE/FALSE)?1. Explain the difference between rational decision making and incremental decision making. 2. Describe what policy analysis is, who does it, and its purpose. 3. Explain how policy analysis is used in the policy making process. 4. Who conducts policy analyses? Discuss the variety of approaches that can be taken. 5. Describe the trade-offs and decisions that policy analysts must make in deciding which type of analysis should be done. Multiple Choice Questions 1. Which of the following require economic analysis for making a good decision? a) Lease or buy b) Go to 7.00 A.M class or sleep late c) Wear a short or long-sleeved shirt d) Attend a seminar or surf the net 2. To have a decision-making situation, there must be at least available. a) One or two alternatives b) Two alternatives c) One course of action d) None of the choices 3. In engineering economic decision making, the criterion to use when inputs are fixed is to a) Minimize the inputs b) Maximize the difference between outputs and inputs c) Maximize the benefits d'i Maximize the inputs 4. It is known as the starting point in the rational decision-making process. a) Assembling relevant data b) Choosing the best alternative Recognizing the existence of problem d) Defining the goals and objectives 5. In engineering decision making, an important source of data is a firm's own a) Competitiveness reports Rational decision thinking c) Financial soundness d') Accounting system 6. An engineer must have a good understanding of engineering economics because engineering solutions must be a) Technically sound b) Economically attractive c) Safe and away from hazards Implementable 7. Rational decision making is a complex process that must use four steps in a logical order: Assemble relevant data II. Identify feasible altematives III. Identify the problem IV. Define the objectives Choose the best answer: a) 1, II, II, IV b) 11, I, IV, III c) III, IV, I, II IV, III, II, I 8. Which of the following is considered as an example of ethics? Establishing systems of belief b) Defining values and fairness c) Determining guidelines for conduct d) All are considered correct 9. It is said to be the foundation for long-term career success. Mentorship bj Integrity c) Hard work Learning experience 10. Ethics in engineering economics analysis focuses on how well and how honestly the decision-making process is conducted based on a) Methods of analysis b) Recommendations c) Follow-up All are considered correct 11. It refers to solving substantial engineering problems in which economic aspects dominate and economic efficiency is the criterion for choosing from among possible alternatives. a) Engineering decision making bj Ethics in engineering economy c) Cost-accounting system Cost and benefit analysisPart I - (this draws on opportunity cost (Ch 1) and markets (Ch 3))_ Describe the fishing market using what you have learned about scarcity, marginal analysis in decision-making, and markets. You must include a discussion of resources, supply and demand, as well as marginal benefits and marginal costs. Think of this as an explanation of the pros and cons of the market using economic terminology
