Q: Suppose that firms face a 40% income tax rate on all
Suppose that firms face a 40% income tax rate on all profits. In particular, losses receive full credit. Firm A has a 50% probability of a $1000 profit and a 50% probability of a $600 loss each year....
See AnswerQ: Suppose you know nothing about widgets. You are going to approach
Suppose you know nothing about widgets. You are going to approach a widget merchant to borrow one in order to short-sell it. (That is, you will take physical possession of the widget, sell it, and ret...
See AnswerQ: In this problem we will use Monte Carlo to simulate the behavior
In this problem we will use Monte Carlo to simulate the behavior of the martingale St/Pt, with Pt as numeraire. Let x0 = S0/P0(0, T ). Simulate the process Let h be approximately 1 day. a. Evaluate...
See AnswerQ: Suppose the current exchange rate between Germany and Japan is 0.
Suppose the current exchange rate between Germany and Japan is 0.02 =C/¥. The euro-denominated annual continuously compounded risk-free rate is 4% and the yen-denominated annual continuously compounde...
See AnswerQ: Use the following inputs to compute the price of a European call
Use the following inputs to compute the price of a European call option: S = $100, K = $50, r = 0.06, σ = 0.30, T = 0.01, δ = 0. a. Verify that the Black-Scholes price is $50.0299. b. Verify that the...
See AnswerQ: Consider two zero-coupon bonds with 2 years and 10 years
Consider two zero-coupon bonds with 2 years and 10 years to maturity. Let a =0.2, b = 0.1, r = 0.05, σVasicek = 10%, and σCIR = 44.721%. The interest rate risk premium is zero in each case. We will co...
See AnswerQ: Using the delta-approximation method and assuming a $10m investment
Using the delta-approximation method and assuming a $10m investment in stock A, compute the 95% and 99% 1-, 10-, and 20-day VaRs for a position consisting of stock A plus one 105-strike put option for...
See AnswerQ: There are four debt issues with different priorities, each promising $
There are four debt issues with different priorities, each promising $30 at maturity. a. Compute the yield on each debt issue assuming that all four mature in 1 year, 2 years, 5 years, or 10 years. b....
See AnswerQ: Suppose that there is a 3%per year chance that the
Suppose that there is a 3%per year chance that the firm’s asset value can jump to zero. Assume that the firm issues 5-year zero-coupon debt with a promised payment of $110. Using the Merton jump model...
See AnswerQ: Suppose you short-sell 300 shares of XYZ stock at $
Suppose you short-sell 300 shares of XYZ stock at $30.19 with a commission charge of 0.5%. Supposing you pay commission charges for purchasing the security to cover the short-sale, how much profit hav...
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