Suppose that the price of corn is risky, with a beta of 0.4. The monthly storage cost is $0.09 per bushel, and the current spot price is $2.87, with an expected spot price in three months of $3. If the expected rate of return on the market is 1.8% per month, with a risk-free rate of 1.1% per month, what is the expected futures cost? Note: Do not round intermediate calculations. Round your final answer to 2 decimal places. Expected futures cost Would you store the corn for three months?

Suppose that the price of corn is risky, with a beta of 0.4. The monthly storage cost is $0.09 per bushel, and the current spot price is $2.87, with an expected spot price in three months of $3. If the expected rate of return on the market is 1.8% per month, with a risk-free rate of 1.1% per month, what is the expected futures cost? Note: Do not round intermediate calculations. Round your final answer to 2 decimal places. Expected futures cost Would you store the corn for three months?

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Assume that K=61, St =65, t = 0.25 (i.e. time to expiry is 3 months), and the risk-free rate is 0.04. The current price of the put option is p = 4. If the price of the call option is 7.17, describe the arbitrage that would be possible, and calculate the profit that would result.
Assume that the risk-free rate, RF, is currently 8%, the market return, RM, is 12%, and asset A has a beta, of 1.10. (could be done on word document or excel). Draw the security market line (SML) Use the CAPM to calculate the required return, on asset A. Assume that as a result of recent economic events, inflationary expectations have declined by 3%, lowering RF and RM to 5% and 9%, respectively. Draw the new SML on the axes in part a, and calculate and show the new required return for asset A. Assume that as a result of recent events, investors have become more risk averse, causing the market return to rise by 2%, to be14%. Ignoring the shift in part c, draw the new SML on the same set of axes that you used before, and calculate and show the new required return for asset A. From the previous changes, what conclusions can be drawn about the impact of (1) decreased inflationary expectations and (2) increased risk aversion on the required returns of risky assets?…
Assume that you are given the following historical returns for the Market and Security J. Also assume that the expected risk-free rate for the coming year is 4.0 percent, while the expected market risk premium is 15.0 percent. Given this information, determine the required rate of return for Security J for the coming year, using CAPM. Year 1 2 O21.20% 3 4 5 6 O22.34% O 23.49% O24.63% O24.10% Market 10.00% 12.00% 16.00% 14.00% 12.00% 10.00% Security J 12.00% 14.00% 18.00% 22.00% 18.00% 14.00%
Assume that the risk-free rate, RF, is currently 8%, the market return, RM, is 12%, and asset A has a beta, of 1.10. (could be done on word document or excel). Draw the security market line (SML) Use the CAPM to calculate the required return, on asset A. Assume that as a result of recent economic events, inflationary expectations have declined by 3%, lowering RF and RM to 5% and 9%, respectively. Draw the new SML on the axes in part a, and calculate and show the new required return for asset A. Assume that as a result of recent events, investors have become more risk averse, causing the market return to rise by 2%, to be14%. Ignoring the shift in part c, draw the new SML on the same set of axes that you used before, and calculate and show the new required return for asset A. From the previous changes, what conclusions can be drawn about the impact of (1) decreased inflationary expectations and (2) increased risk aversion on the required returns of risky assets?
An analyst believes that inflation is going to increase by 2.0% over the next year, while the market risk premium will be unchanged. The analyst uses the Capital Asset Pricing Model (CAPM). The following graph plots the current SML. Calculate Happy Corp.'s new required return. Then, on the graph, use the green points (rectangle symbols) to plot the new SML suggested by this analyst's prediction. Happy Corp.'s new required rate of return is Tool tip: Mouse over the points on the graph to see their coordinates. REQUIRED RATE OF RETURN (Percent) 1.2 1.6 2.0 0.8 RISK (Beta) New SML ? The SML helps determine the risk-aversion level among investors. The higher the level of risk aversion, the the slope of the SML. Which of the following statements best describes the shape of the SML if investors were not at all risk averse? O The SML would be a horizontal line. O The SML would have a negative slope. O The SML would have a positive slope, but the slope would be steeper than it would be if…
The prices of a certain security follow a geometric Brownian motion with parameters mu=.12 and sigma=.24. If the security's price is presently 40, what is the probability that a call option, having four months until its expiration time and with a strike price of K=42, will be exercised? (A security whose price at the time of expiration of a call option is above the strike price is said to finish in the money.) If the interest rate is 8%, what is the risk-neutral valuation of the call option?
In this problem we assume that the annual expected rate of return of the market portfolio is 22% and the annual risk-free rate is 2%. The standard deviation of the market portfolio returns is 22%. Assume the market is in equilibrium such that the Capital Asset Pricing Model (CAPM) holds: the market portfolio is efficient. If you have $1,000 to invest, how should you allocate it to achieve an annual expected return of 26%? Invest $260 in the risk-free asset and $740 in the market portfolio Invest $800 in the risk-free asset and $200 in the market portfolio Invest $1,200 in the risk-free asset and sell short $200 in the market portfolio Borrow $260 at the risk-free rate and invest $1,260 in the market portfolio Invest $200 in the risk-free asset and $800 in the market portfolio Borrow $200 at the risk-free rate and invest $1,200 in the market portfolio
Consider a 6-month futures contract on a financial asset with dividend yield q=3.96% per year. Risk free rate is 10% per year. Current value of an asset is S0=$25. What should be the 6-month futures price on this asset, if there is no convenience yield and storage costs?
Assume that the risk-free rate, RF, is currently 8%, the market return, RM, is 12%, and asset A has a beta, of 1.10. (could be done on word document or excel). a) Draw the security market line (SML) b) Use the CAPM to calculate the required return, on asset A. c) Assume that as a result of recent economic events, inflationary expectations have declined by 3%, lowering RF and RM to 5% and 9%, respectively. Draw the new SML on the axes in part a, and calculate and show the new required return for asset A. d) Assume that as a result of recent events, investors have become more risk averse, causing the market return to rise by 2%, to be14%. Ignoring the shift in part c, draw the new SML on the same set of axes that you used before, and calculate and show the new required return for asset A. e) From the previous changes, what conclusions can be drawn about the impact of (1) decreased inflationary expectations and (2) increased risk aversion on the required returns of risky assets?
The prices of a certain security follow a geometric Brownian motion with parameters mu=.12 and sigma=.24. If the security's price is presently 40, what is the probability that a call option, having four months until its expiration time and with a strike price of K=42, will be exercised? (A security whose price at the time of expiration of a call option is above the strike price is said to finish in the money).
Assume that the risk-free rate, RF, is currently 8%, the market return, RM, is 12%, and asset A has a beta, of 1.10 a) Draw the security market line (SML) b) Use the CAPM to calculate the required return, on asset A. c) Assume that as a result of recent economic events, inflationary expectations have declined by 3%, lowering RF and RM to 5% and 9%, respectively. Draw the new SML on the axes in part a, and calculate and show the new required return for asset A. d) Assume that as a result of recent events, investors have become more risk averse, causing the market return to rise by 2%, to be14%. Ignoring the shift in part c, draw the new SML on the same set of axes that you used before, and calculate and show the new required return for asset A. e) From the previous changes, what conclusions can be drawn about the impact of (1) decreased inflationary expectations and (2) increased risk aversion on the required returns of risky assets?
Suppose the real risk-free rate is 3.00%, the average expected future inflation rate is 4.00%, and a maturity risk premium of 0.10% per year to maturity applies, i.e., MRP = 0.10%(t), where t is the years to maturity. What rate of return would you expect on a 1-year Treasury security, assuming the pure expectations theory is NOT valid? Include the cross-product term, i.e., if averaging is required, use the geometric average. (Round your final answer to 2 decimal places.)

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