Question: Explain the implied repo rate on a

> Referring to problem 15, suppose transaction costs amounted to 0.5 percent of the value of the stock index. Explain how these costs would affect the profitability and the incidence of index arbitrage. Then calculate the range of possible futures prices w

> Identify and explain the primary methods of managing credit risk for derivatives dealers.

> Determine the prices of lookback and modified lookback calls and puts. For the modified lookbacks, use an exercise price of 95.

> Determine the price of an average price Asian call option. Use an exercise price of 95. Count the current price in determining the average. Comment on whether you would expect a standard European call to have a lower or higher price.

> Use the information in problem 9 to set up a dynamic hedge using stock index futures Assume a multiplier of 500. The futures price is 496.29. The volatility is 17.5 percent. The continuously compounded risk-free rate is 3.6 percent, and the call delta is

> On July 5, a market index is at 492.54. You hold a portfolio that duplicates the index and is worth 20,500 times the index. You want to insure the portfolio at a particular value over the period until September 20. You can buy risk-free debt maturing on

> In modern financial derivatives markets, there are many exotic options. Briefly explain compound options, multi-asset options, shout options, and forward start options.

> Suppose the call price is $14.20 and the put price is $9.30 for stock options, where the exercise price is $100, the risk-free interest rate is 5 percent (continuously compounded), and the time to expiration is one year. Explain how you would create a sy

> Explain how weather derivatives could be used by an electric utility to manage the risk associated with power consumption as affected by the weather.

> Demonstrate that the payoffs of a chooser option with an exercise price of X and a time to expiration of T that permits the user to designate it as a call or a put at t can be replicated with two transactions. Specifically, by (1) buying a call with an e

> A convertible bond is a bond that permits the holder to turn in the bond and convert it into a certain number of shares of stock. Conversion would, thus, occur only when the stock does well. As a result of the option to convert the bond to stock, the cou

> Suppose you are asked to assist in the design of an equity-linked security. The instrument is a five-year zero coupon bond with a guaranteed return of 1 percent, compounded annually. At the end of five years, the bond will pay an additional return based

> In this chapter, there are two equations presented for the implied repo rate related to the following bond futures contracts. Explain these equations and discuss the differences between them (1/T) ((CF)[fo(t) + AlT + Clo,r -1 and Bo + Al, CF(t)]fo(t)

> Contrast lookback options and barrier options and explain the difference between in- and out options.

> Derive the terminal stock price of a portfolio insurance strategy with put options such that the upside capture exactly equals 100 percent.

> Suppose an investor owns 1,000 shares of Pear, Inc., stock that is trading at $100 per share. Design a portfolio insurance strategy assuming a strike price of $100, time to maturity of one year, and a put price of $9.35 per share. Compute the number of p

> An investment manager expects a stock to be quite volatile and is considering the purchase of either a straddle or a chooser option. The stock is priced at 44, the exercise price is 40, the continuously compounded risk-free rate is 5.2 percent, and the v

> Consider a ten-year, fixed-rate mortgage of $500,000 that has an interest rate of 12 percent. For simplification, assume that payments are made annually. a. Determine the amortization schedule. b. Using your answer in part a, determine the value of bot

> Using BlackScholesMertonBinomial10e.xlsm, compute the call and put prices for a stock option, where the current stock price is $100, the exercise price is $100, the risk-free interest rate is 5 percent (continuously compounded), the volatility is 30 perc

> A stock is priced at 125.37, the continuously compounded risk-free rate is 4.4 percent, and the volatility is 21 percent. There are no dividends. Answer the following questions. a. Determine a fair price for a two-year asset-or-nothing option with exerc

> Consider a stock priced at 100 with a volatility of 25 percent. The continuously compounded risk-free rate is 5 percent. Answer the following questions about various options, all of which have an original maturity of one year. a. Find the premium on an a

> A portfolio manager is interested in purchasing an instrument with a call option-like payoff but does not want to have to pay money up front. The manager learns from a banker that one can do this by entering into a break forward contract. The manager wan

> Determine the prices of the following barrier options. a. A down-and-out call with the barrier at 90 and the exercise price at 95. b. An up-and-out put with the barrier at 110 and the exercise price at 105. c. Select any other barrier option but base

> Explain the advantages and disadvantages of implementing portfolio insurance using stock and puts in comparison to using a fiduciary call.

> Assume that on December 2, YY, the cheapest bond to deliver was the 6 1/4s maturing on August 15, YY 18. The March contract is priced at 112, and the conversion factor is 1.0269. The June futures price is 111.75. The conversion factor for the 6 1/4s deli

> Suppose a firm plan to borrow $5 million in 180 days. The loan will be taken out at whatever LIBOR is on the day the loan begins and will be repaid in one lump sum90 days later. The firm would like to lock in the rate it pays, so it enters into a forward

> Suppose you work on an interest rate derivatives trading desk and observe the following market quotes. Long (short) $100,000,000 interest rate cap, 90/360-day count, 4 percent strike rate priced at $4,950,000 ($4,925,000). Long (short) $100,000,000 inter

> Suppose you are long a 180-day LIBOR-based FRA (receive floating) with notional amount of $50,000,000. At expiration, LIBOR is 4 percent and the strike rate (the agreed-upon rate) is 3 percent. Assuming a 360-day year, what is the dollar profit or loss o

> Suppose you are long a 90-day LIBOR-based FRA (receive floating) with notional amount of $50,000,000. At expiration, LIBOR is 4 percent and the strike rate (the agreed-upon rate) is 3 percent. Assuming a 360-day year, what is the dollar profit or loss on

> The Black–Scholes–Merton option pricing model assumes that stock price changes are log normally distributed. Show graphically how this distribution changes when an investor is long the stock and long the put.

> Explain how a forward swap is like a swaption and how it is different.

> Explain how a bank could use a swaption to hedge the possibility that it will enter into a pay floating, receive-fixed swap at a later date.

> Explain how the two types of swaptions are like interest rate options and how they are different.

> Consider a call option with an exercise rate of x on an interest rate, which we shall denote as simply L. The underlying rate is an M-day rate and pays off based on 360 days in a year. Now consider a put option on a $1 face value zero coupon bond that pa

> A firm has previously issued fixed-rate nonsalable debt. Because interest rates are perceived to be temporarily high, the firm would like to have the flexibility of calling the debt later when rates are expected to fall and replacing it with floating rat

> Suppose your firm had issued a 12 percent annual coupon, 15-year bond, callable at par at the eighth year. It is now two years later, so the bonds are not callable for another six years. At this time, new bonds could be issued at 8 percent, which is hist

> Explain the impact on the implied repo rate of changing from the bid to the offer futures price, of the longer-dated futures contract.

> Explain how a swaption can be terminated at expiration by either exercising it or settling it in cash. Why are these procedures financially equivalent?

> A company wants to enter into a commitment to initiate a swap in 90 days. The swap would consist of four payments 90 days apart with the underlying being LIBOR. Use the following term structure of LIBOR to solve for the rate on this forward swap Term

> Consider a three-year receiver swaption with an exercise rate of 11.75 percent in which the underlying swap is a $20 million notional amount four-year swap. The underlying rate is LIBOR. At the expiration of the swaption, the LIBOR rates are 10 percent (

> A corporate cash manager who often invests her firm’s excess cash in the Eurodollar market is considering the possibility of investing $20 million for 180 days directly in a Eurodollar CD at 6.15 percent. As an alternative, she considers the fact that th

> A firm is interested in purchasing an interest rate cap from a bank. It has received an offer price from the bank but would like to determine if the price is fair. The cap will consist of two caplets, one expiring in 91 days and the other in 182 days. Th

> On January 15, a firm takes out a loan of $30 million, with interest payments to be made on April 16, July 15, October 14, and the following January 15, when the principal will be repaid. Interest will be paid at LIBOR based on the rate at the beginning

> You are a fund’s manager for a large bank. On April 15, your bank lends a corporation $35 million, with interest payments to be made on July 16, October 15, January 16, and next April 16. The amount of interest will be determined by LIBOR at the beginnin

> As the assistant treasurer of a large corporation, your job is to look for ways your company can lock in its cost of borrowing in the financial markets. The date is June 28. Your firm is taking out a loan of $20 million, with interest to be paid on Septe

> A large, multinational bank has committed to lend a firm $25 million in 30 days at LIBOR plus 100 bps. The loan will have a maturity of 90 days, at which time the principal and all interest will be repaid. The bank is concerned about falling interest rat

> You are the treasurer of a firm that will need to borrow $10 million at LIBOR plus 2.5 points in 45 days. The loan will have a maturity of 180 days, at which time all the interest and principal will be repaid. The interest will be determined by LIBOR on

> The following term structure of LIBOR is given. a. Find the rate on a new 6 9 FRA. b. Consider an FRA that was established previously at a rate of 5.2 percent with a notional amount of $30 million. The FRA expires in 180 days, and the underlying is 18

> The crude oil futures contract on the New York Mercantile Exchange covers 1,000 barrels of crude oil. The contract is quoted in dollars and cents per barrel (e.g., $27.42), and the minimum price change is $0.01. The initial margin requirement is $3,375,

> Explain how the Black model, which is designed for pricing options on futures contracts, can be used for pricing interest rate options.

> Suppose that you wish to buy stock and protect yourself against a downside movement in its price. You consider both a covered call and a protective put. What factors will affect your decision?

> A bank currently holds a loan with a principal of $12 million. The loan generates quarterly interest payments at a rate of LIBOR plus 300 basis points, with the payments made on the 15th of February, May, August, and November on the basis of the actual d

> Explain how an interest rate swap is a special case of a currency swap.

> Compare and contrast the credit value adjustment and the debit value adjustment for an interest rate swap. Why does a swap’s value increase when the firm’s credit rating deteriorates?

> a. Identify and discuss three reasons why U.S. Treasury yields are a biased low estimate for the risk-free rate. b. Explain why LIBOR is a biased high estimate for the risk-free rate. c. Explain the reason for considering OIS as an estimate for the risk-

> Define and explain a constant maturity swap.

> A hedge fund is currently engaged in a plain vanilla euro swap in which it pays euros at the euro floating rate of Erabor and receives euros fixed. It would like to convert this position into one in which it pays the return on the S&P 500and receives eur

> You are a pension fund manager who anticipates having to pay out 8 percent (paid semiannually) on $100 million for the next seven years. You currently hold $100 million of a floating-rate note that pays LIBOR 2 1/2 percent. You view this as an attractive

> A pension fund wants to enter into a six-month equity swap with a notional amount of $60 million. Payments will occur in 90 and 180 days. The swap will allow the fund to receive the return on a stock index, currently at 5,514.67. The fund is considering

> A U.S. corporation is considering entering into a currency swap that will call for the firm to pay dollars and receive British pounds. The dollar notional amount will be $35 million. The swap will call for semiannual payments using the adjustment 180/360

> On September 12, the cheapest-to-deliver bond on the December Treasury bond futures contract is the 9s of November YY 18. The bond pays interest semiannually on May 15 and November 15. Its price is 125 12/32. The December futures price is 112 24/32. The

> The Black–Scholes–Merton option pricing model assumes that stock price changes are log normally distributed. Show graphically how this distribution changes when an investor is long the stock and short the call.

> Repeat the previous problem, but now assume that the one-month LIBOR rate on December 1 was 5.5 percent.

> What organizational structures are used to implement the multidomestic, global, and transnational international strategies?

> What are the differences among the three versions of the multidivisional (M-form) organizational structures that are used to implement the related constrained, the related linked, and the unrelated corporate-level diversification strategies?

> What are the characteristics of the different functional structures used to implement the cost leadership, differentiation, integrated cost leadership/differentiation, and focused business-level strategies?

> What does it mean to say that strategy and structure have a reciprocal relationship?

> What is organizational structure and what are organizational controls? What are the differences between strategic controls and financial controls? What is the importance of these differences?

> What is a strategic network? What is a strategic center firm? How is a strategic center used in business-level, corporate-level, and international cooperative strategies?

> What is the nature of corporate governance in Germany, Japan, and China?

> What is the market for corporate control? What conditions generally cause this external governance mechanism to become active? How does this mechanism constrain top-level managers’ decisions and actions?

> What trends exist regarding executive compensation? What is the effect of the increased use of long-term incentives on top-level managers’ strategic decisions?

> How is each of the three internal governance mechanisms—ownership concentration, boards of directors, and executive compensation—used to align the interests of managerial agents with those of the firm’s owners?

> The mini-case makes it clear that FedEx and UPS have a number of similarities – resources, markets, and the competitive dimensions they emphasize to implement their strategies. However, as resources are not identical, both companies have sought to differ

> What is an agency relationship? What is managerial opportunism? What assumptions do owners of corporations make about managers as agents?

> What is meant by the statement that ownership is separated from managerial control in the corporation? Why does this separation exist?

> What is corporate governance? What factors account for the considerable amount of attention corporate governance receives from several parties, including shareholder activists, business press writers, and academic scholars? Why is governance necessary to

> How can corporate governance foster ethical decisions and behaviors on the part of managers as agents?

> What risks are firms likely to experience as they use cooperative strategies?

> Why do firms use cross-border strategic alliances?

> What are the three corporate-level cooperative strategies? How do firms use each of these strategies for the purpose of creating a competitive advantage?

> What are the four business-level cooperative strategies? What are the key differences among them?

> What is a strategic alliance? What are the three major types of strategic alliances firms form for the purpose of developing a competitive advantage?

> What is the definition of cooperative strategy, and why is this strategy important to firms competing in the twenty-first century competitive landscape?

> The mini-case describes how CEO succession at P&G has had a detrimental effect on firm performance. The successor, Bob McDonald, assumed the position in 2009 but lasted a little under four years. During his tenure, P&G failed to keep up with rivals’ sa

> What are the differences between the cost-minimization approach and the opportunity-maximization approach to managing cooperative strategies?

> What are the strategic competitiveness outcomes firms can reach through international strategies, and particularly through an international diversification strategy?

> What are political risks and what are economic risks? How should firms approach dealing with these risks?

> What five entry modes do firms consider as paths to use to enter international markets? What is the typical sequence in which firms use these entry modes?

> What are some global environmental trends affecting the choice of international strategies, particularly international corporate-level strategies?

> What are the three international corporate-level strategies? What are the advantages and disadvantages associated with these individual strategies?

> What four factors are determinants of national advantage and serve as a basis for international business-level strategies?

> What are the three basic benefits firms can achieve by successfully using an international strategy?

> What incentives influence firms to use international strategies?

> What are two important issues that can potentially affect a firm’s ability to successfully use international strategies?

> What does it mean to be “stuck in the middle” between two strategies (i.e., between low cost and differentiation strategies)?

> What factors affect the likelihood a firm will initiate a competitive response to a competitor’s action(s)?

> What factors affect the likelihood a firm will take a competitive action?

> How do awareness, motivation, and ability affect the firm’s competitive behavior?

> What is market commonality? What is resource similarity? What does it mean to say that these concepts are the building blocks for a competitor analysis?