Questions from Management Science

Q: Amanda has 30 years to save for her retirement. At the

Amanda has 30 years to save for her retirement. At the beginning of each year, she puts $5000 into her retirement account. At any point in time, all of Amanda’s retirement funds are tied up in the sto...

Q: In the financial world, there are many types of complex instruments

In the financial world, there are many types of complex instruments called derivatives that derive their value from the value of an underlying asset. Consider the following simple derivative. A stock’...

Q: Suppose you currently have a portfolio of three stocks, A,

Suppose you currently have a portfolio of three stocks, A, B, and C. You own 500 shares of A, 300 of B, and 1000 of C. The current share prices are $42.76, $81.33, and $58.22, respectively. You plan t...

Q: If you own a stock, buying a put option on the

If you own a stock, buying a put option on the stock will greatly reduce your risk. This is the idea behind portfolio insurance. To illustrate, consider a stock that currently sells for $56 and has an...

Q: For the data in problem 24, the following is an example

For the data in problem 24, the following is an example of a butterfly spread: sell two calls with an exercise price of $50, buy one call with an exercise price of $40, and buy one call with an exerci...

Q: A stock currently sells for $69. The annual growth rate

A stock currently sells for $69. The annual growth rate of the stock is 15%, and the stock’s annual volatility is 35%. The risk-free rate is currently 5%. You have bought a six-month European put opti...

Q: In the Sam’s Bookstore problem, the quantity discount structure is such

In the Sam’s Bookstore problem, the quantity discount structure is such that all the units ordered have the same unit cost. For example, if the order quantity is 2500, then each unit costs $22.25. Som...

Q: A chemical company manufactures three chemicals: A, B, and

A chemical company manufactures three chemicals: A, B, and C. These chemicals are produced via two production processes: 1 and 2. Running process 1 for an hour costs $400 and yields 300 units of A, 10...

Q: A knockout call option loses all value at the instant the price

A knockout call option loses all value at the instant the price of the stock drops below a given “knockout level.” Determine a fair price for a knockout call option when the current stock price is $20...

Q: Suppose an investor has the opportunity to buy the following contract (

Suppose an investor has the opportunity to buy the following contract (a stock call option) on March 1. The contract allows him to buy 100 shares of ABC stock at the end of March, April, or May at a g...