Describe the profit from the following portfolio: a long forward contract on an asset and a long European put option on the asset with the same maturity as the forward contract and a strike price that is equal to the forward price of the asset at the time the portfolio is set up.Explain it

An efficient capital market is best defined as a market in which security prices reflect which one of the following?   Multiple Choice A  Current inflation B  A risk premium C  All available information D  The historical arithmetic rate of return E  The historical geometric rate of return

The required return of a risk-free asset can be approximated by The pure time value of money and anticipated inflation premium. а. The 20-year T-bond yield. Ob. The 90-day T-bill rate plus the risk premium. C. The 90-day T-bill rate plus anticipated inflation premium. d.

Which of the following is TRUE?  a. The convenience yield measures the average return earned by holding futures contracts. b. The convenience yield is always positive for an investment asset. c. The convenience yield is always negative for a consumption asset. d. The convenience yield is always positive or zero.

The value of a European put option can be either directly or inversely to a. Time to expiry b. volatility of the underlying

A particular firm’s portfolio is composed of two assets, which we will call" A" and "B." Let X denote the annual rate of return from asset A, and let Y denote the annual rate of return from asset B. Suppose that E(X) = 0.15, E(Y) = 0.20, SD (X) = 0.05, SD (Y) = 0.06, and CORR (X, Y) = 0.30. Use a spreadsheet to perform the following analysis. (a) What is the expected return of investing 50% of the portfolio in asset A and 50% of the portfolio in asset B? What is the variance of this return? (b) Replace CORR (X, Y) = 0.30 by CORR (X, Y) = 0.60, 0, -0.30, and -0.60 and answer the questions in part (a). What is the impact of correlation on the expected returns and its variance? Explain why this is so. (c) Suppose that the fraction of the portfolio that is invested in asset B is f, and so the fraction of the portfolio that is invested in asset A is (1 – f). Let f vary from f = 0.0 to f = 1.0 in increments of 5% (that is, f = 0.0, 0.05, 0.10, 0.15, ...), and compute the mean and the…

What does beta measure?

What is the Capital Asset Pricing Model (CAPM)? Derive the risk premium when beta is between 0 and 1. Interpret your result.

Consider a two-period binomial market model for an underlying asset with price process S; at each time t. Branching fromt to t+1 results in St+1 and St+1 = dS; in case of a downward price move. You are asked to input values So = 2, u = 2, d = 1/2, r = 0.1, and 8 = 0 to price a European put option with strike price 3. uSt in case of an upward price move, a. Write down the evolution of the underlying stock and the payoff of the option along the tree. b. Determine the structure of the replicating portfolio at times 0 and 1 in every node. c. Determine the price of the option at time 0. d. Explain how the price computed at point (c) would change if the option were of American type.

1. What are the values of the unit claims (C1 and C2)? 2. What is the risk free rate implied by these assets?