Use Monte Carlo simulations with N = 100,000 trajectories to price the follow- ing option: European call option on the stock X₁ with dX₂ = 0.05Xdt +0.25XdB₁ with Xo = 105, strike K = 100, maturity one year T = 1, risk-free rate r 0.05 and volatility o = 0.25.
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- SIMULATION AND MODELING 1. XYZ has a policy of ordering stock when level falls to 15 units the quantity ordered from the supply is always 20 units. The stock at beginning of 1st week is 20 units. The stock holding costs are sh. 10 per week / unit. The cost of placing one order = 25. The stocks out cost are Sh100 per unit. The usage (demand) and lead time (time taken by supply to deliver stock) is uncertain as shown below. NB: Ordering is done the following week upon discovery of the shortages. Demand Probability Lead time Probability 0 0.02 1 0.23 1 0.08 2 0.45 2 0.22 3 0.17 3 0.34 4 0.09 4 0.18 5 0.06 5 0.09 6 1.00 6 0.07 7 1.00 Required; Use the following random numbers 68 52 50 90 59 08 72 44 95 85 81 93 28 89 15 60 03 Use 14 trial numbers to find the cost 2. Customers arrive at a milk booth for the required…The Magellan mutual fund has beaten the Standard andPoor’s 500 during 11 of the last 13 years. People use this asan argument that you can “beat the market.” Here’s anotherway to look at it that shows that Magellan’s beating themarket 11 out of 13 times is not unusual. Consider 50 mutualfunds, each of which has a 50% chance of beating the marketduring a given year. Use simulation to estimate theprobability that over a 13-year period the “best” of the 50mutual funds will beat the market for at least 11 out of 13years. This probability turns out to exceed 40%, whichmeans that the best mutual fund’s beating the market 11 outof 13 years is not an unusual occurrence!MRDL Co.'s bonds, issued 8 years ago, currently sell for $1,123. They have a 9.64% semi-annual coupon rate and a 30-year maturity, a $1,000 par value, and are callable in 10 years from the issue date at $1,065.00. Assume that no costs other than the call premium would be incurred to call and refund the bonds, and also assume that the yield curve is horizontal, with rates expected to remain at current levels in the future. Under these conditions, what rate of return should an investor expect to earn if he or she purchases these bonds, 8 years after the issue? O 6.1173 % 8.5004% 3.2390% 06.0779 % O 8.4043 %
- Reviewing the past history of LIH applications, David estimated the probability that the application decision would be delayed beyond 60 days to be 20%. David then estimated that the probability that the outcome of the new proposal is favourable is 70%. Given that the outcome of the new proposal were favourable, David estimate that the probability of the LIH plan to be approved is 75%; if the outcome were unfavourable, the probability of approval is 30%. Finally, David estimated the probability that the property would still be available for purchase after the policy revision (if Real Estate took no action) to be 80%. David next went to work on the financial analysis of the development project. The estimated profit of the new development project under the LIH plan would be $850,000. This value includes the purchase cost of the property, the cost of renovations, annual maintenance costs, annual rental incomes, and applicable tax shelters. If LIH plan approval were not granted for the…An investment manager wants to determine an optimal portfolio for a wealthy client. The fund has $2.5 million to invest, and its objective is to maximize total dollar return from both growth and dividiends over the course of the coming year. The client has researched eight high-tech companies and wants the portfolio to consist of shares in these firms only. Three of the firms (S1-S3) are primarily software companies, three (H1-H3) are primarily hardware companies, and two (C1-C2) are internet consulting companies. The client has stipulated that no more than 40% of the investment be allocated to any one of these tree sectors. To assure diversification, at least $100,000 must be invested in each of the eight stocks. The table below gives estimates from the investment company's database relating to these stocks. These es- timates include the price per share, the projected annual growth rate in the share price, and the anticipated annual dividend payment per share. Stock Price per share…Reviewing the past history of LIH applications, David estimated the probability that the application decision would be delayed beyond 60 days to be 20%. David then estimated that the probability that the outcome of the new proposal is favourable is 70%. Given that the outcome of the new proposal were favourable, David estimate that the probability of the LIH plan to be approved is 75%; if the outcome were unfavourable, the probability of approval is 30%. Finally, David estimated the probability that the property would still be available for purchase after the policy revision (if Real Estate took no action) to be 80%. David next went to work on the financial analysis of the development project. The estimated profit of the new development project under the LIH plan would be $850,000. This value includes the purchase cost of the property, the cost of renovations, annual maintenance costs, annual rental incomes, and applicable tax shelters. If LIH plan approval were not granted for the…
- GENERATE THE DECISION VARIABLE SOLUTION AND GENERATE AN ANSWER REPORT 2. During the winter WeeMow Lawn Service contracts with customers for cutting lawns starting in the spring. WeeMow provides service to residential and commercial customers. The service has identified 50 possible residential customers and 15 potential commercial customers it has contacted. WeeMow services a customer once every 2 weeks during the growing season. A residential lawn on average takes 1.2 hours to cut, and a commercial property requires 5 hours to cut; the service's available work time is 8 hours, 6 days per week. The profit for a residential lawn is $23, and the profit for a commercial property is $61. The service has established a weekly budget of $350 for management, gas, and other materials, plus equipment repair. A residential lawn averages $12 in management, gas, material, and repair costs, and a commercial property averages $20 in costs. WeeMow wants to know how many residential and commercial jobs…What is meant by discounting cash flows to time 0?A 0% coupon bond maturing in 10 years is yielding 5.29%. The bond's duration is 14.1 years and its convexity is 106.34. What is the new price of the bond if the interest rate rises 1.00%? Multiple Choice $597.21 $513.01 $516.18 $864.32.
- The Miramar Company is going to introduce one of three new products: a widget, a hummer, or a nimnot. The market conditions (favorable, stable, or unfavorable) will determine the profit or loss the company realizes, as shown in the following payoff table: Market Conditions Favorable Stable Unfavorable Product 2 7 W1 Widget $120.000 $70,000 $ 30,000 Hummer $60,000 $40,000 $20,000 Nimnot $35,000 $30,000 $30,000 Using EMV and EOL approach, which product they should introduce? Also calculate Expected Value of Perfect Information (EVPI).Calculating losses in tranches To the right is a graphic representation of a CDO. Lets say there is a loss of 10% on the underlying assets, in our case subprime mortgages, how do you calculate losses in different tranches 1. Figure out the losses on underlying assets: in our case 10% 2. Allocate loss to original senior tranche: O Senior: 0.80 x 0.10 = 8% 3. Allocate losses to mezzanine tranche: O O 4. Break down the mezzanine tranche into CDO tranches: The senior CDO tranche: 0.65 x 7% = 4.55 O Assets O Senior Tranche (80%) AAA Ö Mezzanine Tranche (15%) BBB The mezzanine tranche has an allocation of 15%, however, since it is subordinate (waterfall payment system), it only absorbs losses after the senior tranche has absorbed its 80% share. Calculation: 15% - 8% = 7% 20 Equity Tranche (5%) Not Rated The mezzanine tranche: 0.25 x 7% = 1.75 The equity tranche: 7% - 4.55% -1.75% = 0.7% (or 0.1 x 7% = 0.7%) The mezzanine tranche is repackaged with other mezzanine tranches Senior Tranche…Moore's Law claims to have a "specific sort of price elasticity."Give a short explanation of each of the threats to Moore's Law.