e) Assume that you short sold 100 shares of Enbridge stock and wanted to use an option contract to hedge your position. Using the following coordinate graphs provided, Draw the unhedged risk profile on the left coordinate and illustrate how you hedged your position using an option on the right coordinate. Please indicate what type of option (either Call or Put option) you will use to hedge your position. AV AV
Q: a. Use the appropriate formula to find the value of the annuity. b. Find the interest. Periodic…
A: FV of annuity=Pmt*((1+r)^n-1)/rTotal interest=Future value-Amount invested.
Q: Which of the following is true? PV should always equal FV. PV should always be larger…
A: Present Value (PV) is a financial concept that represents current worth of a future sum of money or…
Q: If a preferred stock dividend rate is 8 percent, the par value is $100, and the discount rate for…
A: Dividend rate = 8%Cost of preferred stock = 7%Par value = $100
Q: kindly explain also 1. Empire plans to invest $20M to refresh 10 of its stores in Ontario. The…
A: NPV is the most used capital budgeting method based on time value of money and can be calculated as…
Q: Tell Corp. has a total book value of equity of $10 million and a book value per share of $20. The…
A: The weighted average cost of capital refers to the average of all costs of capital that are from…
Q: "You have just leased a car. The lease is for three years with monthly payments due at the beginning…
A: Present value is an estimate of the present value of future cash values that may be received at a…
Q: A project cost 25000 is expects to generate cash flows are given as follows @12% for both the…
A: The net present value is the method of finding the profitability of the project by adding up…
Q: The following information is available to you regarding cash and futures prices: Sep futures…
A: The term "basis" is commonly used in the context of futures contracts, and it refers to the…
Q: What is the price implied for an asset providing $100 in state 1 and $50 in state 2?
A: price implied can be calculated using the formula: Price Implied = future value in state 1 x Risk -…
Q: The current compensation output for standard inventory is estimated by using this formula: Y = D /…
A: The term "current compensation" typically refers to the amount of money or other benefits an…
Q: In an adjustable-rate mortgage (ARM), future mortgage payments will reflect periodic changes in…
A: Adjustable-rate mortgages (ARMs) are a type of mortgage loan where the interest rate is not fixed…
Q: The Fritzes are buying a house that sells for $92,000. The bank is requiring a minimum down payment…
A: Here,Cost of House is $92,000Down Payment is 15%Closing Point is 3%
Q: An oil exploration firm is currently searching for oil. Their probability of finding oil this year…
A: We Have;probability of finding oil this year is 29%Expected return if we found oil is 39%If we don't…
Q: Charlie needs a $275,000 mortgage and he'd like to pay it off in 30 years. He is considering two…
A: A mortgage is also a type of loan, A mortgage loan gives by a bank or financial institution, or…
Q: (Bond valuation relationships) A bond of Telink Corporation pays $110 in annual interest, with a…
A: A bond is a kind of debt security issued by the government and private companies to the public for…
Q: Use both the TVM equations and a financial calculator to find the following values. (Hint: If you…
A: Future value represents the expected value of the present series of annuity cash flows or expected…
Q: You just attended a conference which titled “Issues in Financial Reporting’. Your Financial…
A: Financial reporting is a means of communicating insight and transparent financial and operational…
Q: Falco Inc. financed the purchase of a machine with a loan at 4.34% compounded quarterly. This loan…
A: Loans are paid by fixed periodic payments and these payments carry payment for interest and loan…
Q: On January 1, Keunho Industries leased equipment to a customer for a four-year period, at which time…
A: Lease is kind of finance arrangement in which equipment can be used with annual payments and no…
Q: Present Value of an Annuity Estimate the present value of an annuity if payments are $1300 monthly…
A: Annuity is when the payments are for fixed period of time and payments are made at uniform and…
Q: McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell for $815 per set and…
A: Net present value (NPV):Net present value is a tool used to assess the future profitability of an…
Q: The president of Real Time Inc. has asked you to evaluate the proposed acquisition of a new…
A: Net Cash flow is that amount which is earned by the investor from the project. It includes the…
Q: You have $40,000 to invest in a stock trading at $25 per share. Your brokerage firm has a 60%…
A: It is a case of future trading where a trader is taking a short position. Initial capital for…
Q: Which of the following is the risk due to a firm's debt usage? Business risk Financial…
A: The investments that we make in debt, equity and other financial securities are exposed to different…
Q: Market Cap = 5.65B Long term debt = 748,000 Beta for 5 years monthly =0.27 Avg. volume…
A: Cost of Equity (Re): The cost of equity can be calculated using the Capital Asset Pricing Model…
Q: If an asset is $100 in state 1, and is $50 in state 2, what is it’s implied price?
A: Implied PriceThe term "Implied Price" refers to the average of the closing prices of the shares of…
Q: Nielson Motors has no debt, and maintains a policy of holding $92 million in excess cash reserves,…
A: Cash reserves are those reserves which are maintained for cash. Cost of maintaining reserves will be…
Q: A bank today makes $100 in 3-year loans with a 16% fixed annual interest rate. It funds the loans…
A: Here,Interest Rate on Loan is 16%Interest Rate on CD is 7%Variable Interest Rate is 4.5%Fixed…
Q: You would like to take a trip in 10 years that is expected to cost $55,000 at that time. If you can…
A: Present value of future amount is computed byfollowing formula-PV = A ÷ ( 1+r)nWhere,PV = Present…
Q: You are a manager at Northern Fibre, which is considering expanding its operations in synthetic…
A: The Value of a Project is the net addition to the Wealth of the company by undertaking that…
Q: Fort Collins Realty Partners has a bond issue outstanding that pays a 5.90 percent coupon and…
A: Bonds are debt instruments issued by companies/entities.The issuing company pays periodic coupons or…
Q: Determine the nominal annual rate of interest of the following ordinary general annuity. Term…
A: The annual rate of interest refers to the interest rate thang charged by the lender from the…
Q: What does WRF = -0.50 mean?
A: W RF stands for weight of riskfree asset in the portfolio. Weight is simply the % proportion of the…
Q: Cullumber Clinic is considering investing in new heart-monitoring equipment. It has two options.…
A: Net Present Value - It is the difference between the present value of cash outflow and present value…
Q: Treat the returns as integers (a return of 1% is written as R = 1). Round final answers to two…
A: The market price of risk refers to the compensation or premium demanded by investors for taking on…
Q: Which of the following returns is known at the end of an investment (or at the end of the semester…
A: Realized returns: These are the actual returns that are earned on the investment and are based on…
Q: TWITTERCO has an opportunity to invest in two business initiatives: MUSK #7 & MUSK #8 Expected cash…
A: The payback period is a basic capital budgeting method used to assess the time required for an…
Q: The Federal Reserve Banks are O public: private commercial banks in the district where the Reserve…
A: The Federal Reserve System, often referred to as the Fed, is the central banking system of the…
Q: You purchased 300 shares of BFF stock in January 2009 for $52 per share. Each year you received a…
A: Holding period return (HPR) is the total return earned by an investor on an investment over a…
Q: During 2019, Jason Glen has net employment income of $12000, net rental income of $4800, as well as…
A: A non-capital loss arises when your deductions for the year are more than your income for that year.…
Q: A two-year bond with par value $1,000 making annual coupon payments of $100 is priced at $1,000.…
A: The interest on bonds with coupons is periodically paid to the bondholder until the bond's maturity…
Q: At an interest rate of 6%, how long will it take to 4x your money? PLEASE BREAK DOWN
A: Assumption: It is simple interestData : Interest rate =6%Compute: Time required to 4x the money
Q: 1. Two projects being considered by a firm are independent and have the following projected cash…
A: Before investing in new projects or assets, the profitability of the project is evaluated by using…
Q: Expected return is best described as ________________________________ and is based on the single…
A: Expected return is a key concept in finance that measures the average return an investor expects to…
Q: ost of bank loan Data Back-Up Systems has obtained a $25,000, 90-day bank loan at an annu ayable at…
A: Loans are amount obtained from lenders and we have to return that money after a certain period…
Q: What range of returns should you expect to see with a 99.7 percent probability on an asset that has…
A: Investors and analysts assess the performance of specific assets, portfolios, or whole markets using…
Q: Consider the following information and then calculate the required rate of return for the Global…
A: Market Rate of return = rm = 10%Risk Free rate = rf = 7.25%
Q: What is Project B's MIRR?
A: MIRR is the price in an investment plan that equalizes the most recent cash inflow with the most…
Q: Sheridan Company is considering a long-term investment project called ZIP.ZIP will require an…
A: The concepts of capital budgeting will be used and applied here.Capital budgeting tools are used to…
Q: You are asked to evaluate the following two projects for the Norton corporation. Use a discount rate…
A: Year Project XProject Y0-44000-6400012200032000220000250003210002600042060028000Discount…
13
Step by step
Solved in 3 steps with 4 images
- Please answer one of the following questions in detail, providing examples whenever applicable. Discuss the risks and payoffs of the following positions, accompanied by payoff graphs. Buy stock and a put option on the stock. Buy a stock. Buy a call. Buy stock and sell a call option on the stock (covered call). Buy a bond. Buy stock, buy a put, and sell a call. Sell a put (naked put).Assume a stock with an option with the information as follows. • Stock purchased price was $113.• Call option on the stock was purchased at $4. • Call option has strike price at $115.• the stock price is $117on expiration date Please explain the Call Options Payoff Diagrams below, why it plot like this (please explain step by step) . Thank you for your answeringA trader buys a call option on a share for K2. The stock price is K25 and the strike price is K20. State the circumstances under which the trader will make a profit. State the circumstances under which the option will be exercised. Draw a diagram in support of your answers above, showing the variation of the trader’s profit with the stock price at the maturity of the option.
- Finance (a) Consider a portfolio with a Delta of 100, a Gamma of -20, and a Vega of -10. There are two traded options available: Traded options 1 Traded options 2 Delta 0.2 -0.1 Gamma Vega 0.01 0.05 0.5 0.3 What position in the traded option and/or underlying stock would make the portfolio Gamma and Vega neutral? (Required: Show your work step by step)D3) Finance a) What does the option delta refer to? For a standard European put option, draw the graph of the delta as a function of the price of the underlying asset. b) You have delta hedged a long call position on a stock. The stock price drops. Explain how you would adjust your hedgeDescribe the effect of a change in each of the following factorson the value of a call option: (1) stock price, (2) exercise price,(3) option life, (4) risk-free rate, and (5) stock return standarddeviation (i.e., risk of stock).
- You are given the following information on some company's stock, as well as the risk- free asset. Use it to calculate the price of the call option written on that stock, as well as the price of the put option. (HINT: You should use the Black-Scholes formula!) (Do not round intermediate calculations and round your final answers to 2 decimal places, e.g., 32.16.) Today's stock = $74 price Exercise price = $70 Risk-free rate = Option maturity = 4 months Standard deviation of annual stock returns 4.4% per year, compounded continuously Call price Put price = 62% per yearDescribe what a stock option is. what does it means to buy a "put" or a "call" and what you are expecting the stock to do for each (ie go up or down in price). Discuss when you would make money on a put option and when you would make money on a call option.Label the following for this diagram: a. Name of options payoff b. Identify whether positive or negative premium c. Identify breakeven point d. What is the profit or loss when stock price is S60 at maturity e. Suppose you have this options position, should you exercise your right (if any) assuming that the stock price is $60 at maturity? Option Payoffs and Profits Long put $40 $20 $0 Option Payoff Option Profit Exerche Price $20 S40 $20 $40 S60 $80. Stock Price At Maturity Payoff and Profit
- You use the Black-Scholes-Merton model for a put option on a stock. You calculate N(d1) = 0.60 and N(d2) = 0.56. a) What is the delta of the put option? Solution for A = -0.40 b) You short 100 put options. How would you hedge your delta exposure using the underlying stock? How many shares would you need to buy or sell?You have been provided the following data about the securities of three firms, the market portfolio, and the risk-free asset a. Fill in the missing values in the table. (Leave no cells blank be certain to enter O wherever required. Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) Security Fimm A Fim B Fim C The market portfolio The risk-fres asset Expected retum O Buy O Sell Expected retum Expected Return 0.119 0.131 O Buy ⒸSell 0.112 0.12 0.05 With the market portfolio b-1. What is the expected return of Firm A? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g.. 32.16.) Expected retum Standard Deviation 0.22 b-2. What is your investment recommendation regarding Firm A for someone with a well- diversified portfolio? O Sell O Buy 0.75 0.19 Correlation b-3. What is the expected return of Firm B? (Do not round intermediate calculations and enter your answer as a percent rounded to 2…You are given the following information on some company's stock, as well as the risk- free asset. Use it to calculate the price of the call option written on that stock, as well as the price of the put option. (HINT: You should use the Black-Scholes formula!) (Do not round intermediate calculations and round your final answers to 2 decimal places, e.g., 32.16.) Today's stock = $86 price Exercise price = $85 Risk-free rate = Option maturity = 4 months Standard deviation of 5% per year, compounded continuously annual stock returns = 62% per year