The intergalactic currency market exchange ratio, $M/$U.S., between the Martian Dollar [SM] and the U.S. Dollar [SUS] presently is 1/5. The price of a bushel of apples on Mars is two (2) Martian Dollars, or MPA = $M2.00. The corresponding price of an economically identical bushel of apples on Earth is one (1) U.S. Dollar, or USPA = $US1.00. Calculate the first round of profits for a person arbitraging the apples who starts out with $US100,000 in cash holdings. a.) $US 200,000 profit from participating in commodity arbitrage b.) $US 500,000 profit from participating in commodity arbitrage. c.) $US 900,000 profit from participating in commodity arbitrage. d.) $US 1,000,000 profit from participating in commodity arbitrage. The sequence of events specified by the Purchasing Power Parity (PPP) Theory of Foreign Exchange is amended in order to account for the market process of speculation. What causes import prices and the prices of domestically produced goods and services to change in the amended sequence? a.) a changing supply of money and credit. b.) changing prices of imported oil and natural gas. c.) an improving or deteriorating Balance-of-Payments (BOP). d.) a changing exchange-rate. The Balance-of-Payments (BOP) Adjustment Mechanism is: a.) part of the criticism of the BOP Theory of Foreign Exchange. b.) part of the Purchasing Power Parity (PPP) Theory of Foreign Exchange. c.) part of the BOP Theory of Foreign Exchange. d.) a description of how a country can run out of money. Exercise 4. An investor comes to you believing she has identified an arbitrage opportunity for a stock as indicated by the following information: Stock spot price $120 Dividend paid in 1 year $3 Futures price for stock expiring in 1 year $125 Interest rate for 1 year 8% Explain what in the theory we studied fails so that the arbitrage opportunity arises. Describe the transactions necessary to take advantage of this arbitrage opportunity. Calculate the arbitrage profit. Last month, you found the tangency portfolio and constructed your optimal complete portfolio, which is a mix of the tangency portfolio and the risk-free asset. Today new information about the stock market is released and affects the moments (mean, variance, and covariance) of all stock returns. You update your belief on the moments, find the new tangency portfolio, and re-construct your optimal complete portfolio, given new information. The risk premium of the updated tangency portfolio is 1.42 times the previous one, and the volatility of the updated tangency portfolio is 1.1 times the previous one due to the new information. If the weight on the tangency portfolio was 0.6 and 0.4 on the risk-free asset in your previous optimal complete portfolio, what is the weight on the updated tangency portfolio in your re-constructed optimal complete portfolio? Assume your attitude to risk ( = price of risk) remains the same.