Question: Joel Franklin is a portfolio manager responsible

> We will derive a two-state put option value in this problem. Data: S0 = 100; X = 110; 1 + r = 1.10. The two possibilities for ST are 130 and 80. a. Show that the range of S is 50, whereas that of P is 30 across the two states. What is the hedge ratio of

> In each of the following questions, you are asked to compare two options with parameters as given. The risk-free interest rate for all cases should be assumed to be 4%. Assume the stocks on which these options are written pay no dividends. Which put opti

> Return to Problem 38. a. What will be the payoff to the put, Pu, if the stock goes up? b. What will be the payoff, Pd, if the stock price falls? c. Value the put option using the risk-neutral shortcut described in the box in Section 21.3. d. Confirm that

> Eagle Products’ EBIT is $300, its tax rate is 21%, depreciation is $20, capital expenditures are $60, and the planned increase in net working capital is $30. What is the free cash flow to the firm?

> Return to Problem 36. Value the call option using the risk-neutral shortcut described in the box in Section 21.3. Confirm that your answer matches the value you get using the two-state approach. Problem 36: You are attempting to value a call option with

> Suppose that JPMorgan Chase sells call options on $1.25 million worth of a stock portfolio with beta = 1.5. The option delta is .8. It wishes to hedge its resultant exposure to a market advance by buying a market-index portfolio. a. How many dollars’ wor

> Using the data in Problem 46, suppose that 3-month put options with a strike price of $90 are selling at an implied volatility of 34%. Construct a delta-neutral portfolio comprising positions in calls and puts that will profit when the option prices come

> Suppose that call options on ExxonMobil stock with time to expiration 3 months and strike price $90 are selling at an implied volatility of 30%. ExxonMobil stock price is $90 per share, and the risk-free rate is 4%. a. If you believe the true volatility

> You are a provider of portfolio insurance and are establishing a 4-year program. The portfolio you manage is worth $100 million, and you hope to provide a minimum return of 0%. The equity portfolio has a standard deviation of 25% per year, and T-bills pa

> You are holding call options on a stock. The stock’s beta is .75, and you are concerned that the stock market is about to fall. The stock is currently selling for $5 and you hold 1 million options (i.e., you hold 10,000 contracts for 100 shares each). Th

> Goldman Sachs believes that market volatility will be 20% annually for the next three years. Three-year at-the-money call and put options on the market index sell at an implied volatility of 22%. What options portfolio can Goldman establish to speculate

> “The beta of a call option on the S&P 500 index with an exercise price of 2,430 is greater than the beta of a call on the index with an exercise price of 2,440.” True or false?

> “The beta of a call option on FedEx is greater than the beta of a share of FedEx.” True or false?

> XYZ Corp. will pay a $2 per share dividend in two months. Its stock price currently is $60 per share. A European call option on XYZ has an exercise price of $55 and 3-month time to expiration. The risk-free interest rate is .5% per month, and the stock’s

> Mary Smith, a CFA candidate, was recently hired for an analyst position at a large bank in London. Her first assignment is to examine the competitive strategies employed by various French wineries. Smith’s report identifies four winerie

> Calculate the value of a put option with exercise price $100 using the data in Problem 36. Show that put-call parity is satisfied by your solution. Problem 36: You are attempting to value a call option with an exercise price of $100 and one year to expi

> A newly issued bond paying a semiannual coupon has the following characteristics: a. Calculate modified duration using the information above. b. Explain why modified duration is a better measure than maturity when calculating the bond’s

> Louise and Christopher Maclin (see Problem 8) have purchased their house and made the donation to the local charity. Now that an investment policy statement has been prepared for the Maclins, Grant Webb recommends that they consider the strategic asset a

> Christopher Maclin, aged 40, is a supervisor at Barnett Co. and earns an annual salary of £80,000 before taxes. Louise Maclin, aged 38, stays home to care for their newborn twins. She recently inherited £900,000 (after wealth-tr

> John Franklin is a recent widower with some experience in investing for his own account. Following his wife’s recent death and settlement of the estate, Mr. Franklin owns a controlling interest in a successful privately held manufacturing company in whic

> Susan Fairfax is president of Reston Industries, a U.S.-based company whose sales are entirely domestic and whose shares are listed on the New York Stock Exchange. The following are additional facts concerning her current situation: ∙ F

> Jarvis University (JU) is a private, multiprogram U.S. university with a $2 billion endowment fund as of fiscal year-end May 31, 2025. With little government support, JU is heavily dependent on its endowment fund to support ongoing expenditures, especial

> Sam Short, CFA, has recently joined the investment management firm of Green, Spence, and Smith (GSS). For several years, GSS has worked for a broad array of clients, including employee benefit plans, wealthy individuals, and charitable organizations. Als

> Angus Walker, CFA, is reviewing the defined benefit pension plan of Acme Industries. Based in London, Acme has operations in North America, Japan, and several European countries. Next month, the retirement age for full benefits under the plan will be low

> After much research on the developing economy and capital markets of the country of Otunia, your firm, GAC, has decided to include an investment in the Otunia stock market in its Emerging Markets Commingled Fund. However, GAC has not yet decided whether

> Sisters Corp. expects to earn $6 per share next year. The firm’s ROE is 15% and its plowback ratio is 60%. If the firm’s market capitalization rate is 10%, what is the present value of its growth opportunities?

> a. Pamela Itsuji, a currency trader for a Japanese bank, is evaluating the price of a 6-month Japanese yen/U.S. dollar currency futures contract. She gathers the following currency and interest rate data: Japanese yen/U.S. dollar spot currency exchange r

> The Windsor Foundation, a U.S.-based, not-for-profit charitable organization, has a diversified investment portfolio of $100 million. Windsor’s board of directors is considering an initial investment in emerging market equities. Robert Houston, treasurer

> A global manager plans to invest $1 million in U.S. government cash equivalents for the next 90 days. However, she is also authorized to use non–U.S. government cash equivalents, as long as the currency risk is hedged to U.S. dollars us

> You are a U.S. investor considering purchase of one of the following securities. Assume that the currency risk of the Canadian government bond will be hedged, and the 6-month discount on Canadian dollar forward contracts is −.75% versus

> John Irish, CFA, is an independent investment adviser who is assisting Alfred Darwin, the head of the Investment Committee of General Technology Corporation, to establish a new pension fund. Darwin asks Irish about international equities and whether the

> An analyst wants to evaluate portfolio X, consisting entirely of U.S. common stocks, using both the Treynor and Sharpe measures of portfolio performance. The following table provides the average annual rate of return for portfolio X, the market portfolio

> The Retired Fund is an open-ended mutual fund composed of $500 million in U.S. bonds and U.S. Treasury bills. This fund has had a portfolio duration (including T-bills) of between 3 and 9 years. Retired has shown first-quartile performance over the past

> Carl Karl, a portfolio manager for the Alpine Trust Company, has been responsible since 2023 for the City of Alpine’s Employee Retirement Plan, a municipal pension fund. Alpine is a growing community, and city services and employee payr

> James Chan is reviewing the performance of the global equity managers of the Jarvis University endowment fund. Williamson Capital is currently the endowment fund’s only large-capitalization global equity manager. Performance data for Wi

> Trustees of the Pallor Corp. pension plan ask consultant Donald Millip to comment on the following statements. What should his response be? a. Median manager benchmarks are statistically unbiased measures of performance over long periods of time. b. Medi

> During the annual review of Acme’s pension plan, several trustees questioned their investment consultant about various aspects of performance measurement and risk assessment. a. Comment on the appropriateness of using each of the following benchmarks for

> a. Footnote 7 presents the formula for the convexity of a bond. Build a spreadsheet to calculate the convexity of a 5-year, 8% coupon bond making annual payments at the initial yield to maturity of 10%. b. What is the convexity of a 5-year zero-coupon bo

> You and a prospective client are considering the measurement of investment performance, particularly with respect to international portfolios for the past five years. The data you discussed are presented in the following table: a. Assume that the data fo

> You ran a regression of the yield of KC Company’s 10-year bond on the 10-year U.S. Treasury benchmark’s yield using month-end data for the past year. You found the following result: YieldKC = 0.54 + 1.22 YieldTreasury where YieldKC is the yield on the K

> You are provided the information outlined as follows to be used in solving this problem. Situation A A fixed-income manager holding a $20 million market value position of U.S. Treasury 11¾% bonds maturing November 15, 2035, expects the econ

> Janice Delsing, a U.S.-based portfolio manager, manages an $800 million portfolio ($600 million in stocks and $200 million in bonds). In reaction to anticipated short-term market events, Delsing wishes to adjust the allocation to 50% stock and 50% bonds

> After studying Iris Hamson’s credit analysis, George Davies is considering whether he can increase the holding-period return on Yucatan Resort’s excess cash holdings (which are held in pesos) by investing those cash ho

> René Michaels, CFA, plans to invest $1 million in U.S. government cash equivalents for the next 90 days. Michaels’s client has authorized her to use non–U.S. government cash equivalents, but only if the cu

> Suppose your client says, “I am invested in Japanese stocks but want to eliminate my exposure to this market for a period of time. Can I accomplish this without the cost and inconvenience of selling out and buying back in again if my expectations change?

> Donna Doni, CFA, wants to explore potential inefficiencies in the futures market. The TOBEC stock index has a spot value of 185. TOBEC futures contracts are settled in cash and underlying contract values are determined by multiplying $100 times the index

> Ken Webster manages a $400 million equity portfolio benchmarked to the S&P 500 index. Webster believes the market is overvalued when measured by several traditional fundamental/ economic indicators. He is concerned about potential losses but recogniz

> A stock index is currently trading at 50. Paul Tripp, CFA, wants to value 2-year index options using the binomial model. The stock will either increase in value by 20% or fall in value by 20%. The annual risk-free interest rate is 6%. No dividends are pa

> The aspect least likely to be included in the portfolio management process is a. Identifying an investor’s objectives, constraints, and preferences. b. Organizing the management process itself. c. Implementing strategies regarding the choice of assets to

> Michael Weber, CFA, is analyzing several aspects of option valuation, including the determinants of the value of an option, the characteristics of various models used to value options, and the potential for divergence of calculated option values from obs

> The board of directors of Abco Company is concerned about the downside risk of a $100 million equity portfolio in its pension plan. The board’s consultant has proposed temporarily (for 1 month) hedging the portfolio with either futures or options. Referr

> a. Consider a bullish spread option strategy using a call option with a $25 exercise price priced at $4 and a call option with a $40 exercise price priced at $2.50. If the price of the stock increases to $50 at expiration and each option is exercised on

> Rich McDonald, CFA, is evaluating his investment alternatives in Ytel Incorporated by analyzing a Ytel convertible bond and Ytel common equity. Characteristics of the two securities are given in the following exhibit: a. Calculate, based on the exhibit,

> Suresh Singh, CFA, is analyzing a convertible bond. The characteristics of the bond and the underlying common stock are given in the following exhibit: Convertible Bond Characteristics Par value………………………………………………………$1,000 Annual coupon rate (annual pay)…

> Martin Bowman is preparing a report distinguishing traditional debt securities from structured note securities. Discuss how the following structured note securities differ from a traditional debt security with respect to coupon and principal payments: a.

> Donna Donie, CFA, has a client who believes the common stock price of TRT Materials (currently $58 per share) could move substantially in either direction in reaction to an expected court decision involving the company. The client currently owns no TRT s

> In reviewing the financial statements of the Graceland Rock Company, you note that net income increased while cash flow from operations decreased from 2020 to 2021. a. Explain how net income could increase for Graceland Rock Company while cash flow from

> Eastover Company (EO) is a large, diversified forest products company. Approximately 75% of its sales are from paper and forest products, with the remainder from financial services and real estate. The company owns 5.6 million acres of timberland, which

> Your client says, “With the unrealized gains in my portfolio, I have almost saved enough money for my daughter to go to college in 8 years, but educational costs keep going up.” On the basis of this statement alone, which one of the following appears to

> Eastover Company (EO) is a large, diversified forest products company. Approximately 75% of its sales are from paper and forest products, with the remainder from financial services and real estate. The company owns 5.6 million acres of timberland, which

> Eastover Company (EO) is a large, diversified forest products company. Approximately 75% of its sales are from paper and forest products, with the remainder from financial services and real estate. The company owns 5.6 million acres of timberland, which

> Eastover Company (EO) is a large, diversified forest products company. Approximately 75% of its sales are from paper and forest products, with the remainder from financial services and real estate. The company owns 5.6 million acres of timberland, which

> Janet Ludlow is a recently hired analyst. After describing the electric toothbrush industry, her first report focuses on two companies, QuickBrush Company and SmileWhite Corporation, and concludes: QuickBrush is a more profitable company than SmileWhite,

> The DuPont formula defines the net return on shareholders’ equity as a function of the following components: ∙ Operating margin ∙ Asset turnover ∙ Interest burden ∙

> Jones Group has been generating stable after-tax return on equity (ROE) despite declining operating income. Explain how it might be able to maintain its stable after-tax ROE.

> The information in the following exhibit comes from the notes to the financial statements of QuickBrush Company and SmileWhite Corporation: Determine which company has the higher quality of earnings by discussing each of the three notes.

> Rio National Corp. is a U.S.-based company and the largest competitor in its industry. Tables 18F through 18I present financial statements and related information for the company. Table 18J presents relevant industry and market data. The portfolio manag

> Janet Ludlow’s firm requires all its analysts to use a two-stage dividend discount model (DDM) and the capital asset pricing model (CAPM) to value stocks. Using the CAPM and DDM, Ludlow has valued QuickBrush Company at $63 per share. Sh

> Peninsular Research is initiating coverage of a mature manufacturing industry. John Jones, CFA, head of the research department, gathered the following fundamental industry and market data to help in his analysis: Forecast industry earnings retention rat

> An investor in the common stock of companies in a foreign country may wish to hedge against the _____ of the investor’s home currency and can do so by _____ the foreign currency in the forward market. a. depreciation; selling. b. appreciation; purchasing

> Mike Brandreth, an analyst who specializes in the electronics industry, is preparing a research report on Dynamic Communication. A colleague suggests to Brandreth that he may be able to determine Dynamic’s implied dividend growth rate from Dynamic’s curr

> Dynamic Communication is a U.S. industrial company with several electronics divisions. The company has just released its 2020 annual report. Tables 18C and 18D present a summary of Dynamic’s financial statements for the years 2019 and 2

> Christie Johnson, CFA, has been assigned to analyze Sundanci using the constant dividend growth price/earnings (P/E) ratio model. Johnson assumes that Sundanci’s earnings and dividends will grow at a constant rate of 13%. a. Calculate t

> Abbey Naylor, CFA, has been directed to determine the value of Sundanci’s stock using the Free Cash Flow to Equity (FCFE) model. Naylor believes that Sundanci’s FCFE will grow at 27% for two years and 13% thereafter. C

> Helen Morgan, CFA, has been asked to use the DDM to determine the value of Sundanci, Inc. Morgan anticipates that Sundanci’s earnings and dividends will grow at 32% for two years and 13% thereafter. Calculate the current value of a shar

> Shaar (see CFA Problem 10) has revised slightly her estimated earnings growth rate for Rio National and, using normalized (underlying trend) EPS, which is adjusted for temporary impacts on earnings, now wants to compare the current value of Rio National&

> While valuing the equity of Rio National Corp. (see CFA Problem 9), Katrina Shaar is considering the use of either cash flow from operations (CFO) or free cash flow to equity (FCFE) in her valuation process. a. State two adjustments that Shaar should mak

> At Litchfield Chemical Corp. (LCC), a director of the company said that the use of dividend discount models by investors is “proof ” that the higher the dividend, the higher the stock price. a. Using a constant-growth dividend discount model as a basis o

> As a securities analyst, you have been asked to review a valuation of a closely held business, Wigwam Autoparts Heaven, Inc. (WAH), prepared by the Red Rocks Group (RRG). You are to give an opinion on the valuation and to support your opinion by analyzin

> Janet Ludlow is preparing a report on U.S.-based manufacturers in the electric toothbrush industry and has gathered the information shown in Tables 17B and 17C. Ludlow’s report concludes that the electric toothbrush industry is in the m

> The correlation coefficient between the returns on a broad index of U.S. stocks and the returns on indexes of the stocks of other industrialized countries is mostly _____, while the correlation coefficient between the returns on highly diversified portfo

> Adams’s research report (see CFA Problem 3) continued as follows: “With a business recovery already under way, the expected profit surge should lead to a much higher price for Universal Auto stock. We strongly recommend purchase.” a. Discuss the business

> As part of your analysis of debt issued by Monticello Corporation, you are asked to evaluate two of its bond issues, shown in the following table. a. Using the duration and yield information in the table above, compare the price and yield behavior of the

> Universal Auto is a large multinational corporation headquartered in the United States. For segment reporting purposes, the company is engaged in two businesses: production of motor vehicles and information processing services. The motor vehicle busines

> Janet Meer is a fixed-income portfolio manager. Noting that the current shape of the yield curve is flat, she considers the purchase of a newly issued, 7% coupon, 10-year maturity, option-free corporate bond priced at par. The bond has the following feat

> Carol Harrod is the investment officer for a $100 million U.S. pension fund. The fixed-income portion of the portfolio is actively managed, and a substantial portion of the fund’s large capitalization U.S. equity portfolio is indexed and managed by Webb

> A member of a firm’s investment committee is very interested in learning about the management of fixed-income portfolios. He would like to know how fixed-income managers position portfolios to capitalize on their expectations concerning three factors tha

> You are the manager for the bond portfolio of a pension fund. The policies of the fund allow for the use of active strategies in managing the bond portfolio. It appears that the economic cycle is beginning to mature, inflation is expected to accelerate,

> Patrick Wall is considering the purchase of one of the two bonds described in the following table. Wall realizes his decision will depend primarily on effective duration, and he believes that interest rates will decline by 50 basis points at all maturiti

> One common goal among fixed-income portfolio managers is to earn high incremental returns on corporate bonds versus government bonds of comparable durations. The approach of some corporate-bond portfolio managers is to find and purchase those corporate b

> Sandra Kapple presents Maria VanHusen with a description, given in the following table, of the bond portfolio held by the Star Hospital Pension Plan. All securities in the bond portfolio are noncallable U.S. Treasury securities. a. Calculate the modified

> You are a U.S. investor who purchased British securities for £2,000 one year ago when the British pound cost U.S.$1.50. What is your total return (based on U.S. dollars) if the value of the securities is now £2,400 and the pound is worth $1.45? No divide

> Bonds of Zello Corporation with a par value of $1,000 sell for $960, mature in five years, and have a 7% annual coupon rate paid semiannually. a. Calculate each of the following yields: i. Current yield. ii. Yield to maturity to the nearest whole percent

> Identify the fundamental distinction between a futures contract and an option contract, and briefly explain the difference in the manner that futures and options modify portfolio risk.

> An unanticipated expansionary monetary policy has been implemented. Indicate the impact of this policy on each of the following four variables: a. Inflation rate. b. Real output and employment. c. Real interest rate. d. Nominal interest rate.

> a. Explain the impact on the offering yield of adding a call feature to a proposed bond issue. b. Explain the impact on both effective bond duration and convexity of adding a call feature to a proposed bond issue.

> Use the following data to solve this problem. Cash payments for interest ……………………………………….$(12) Retirement of common stock ………………………………………(32) Cash payments to merchandise suppliers ……………………..(85) Purchase of land …………………………………………………………..(8) Sale of equip

> a. A 6% coupon bond paying interest annually has a modified duration of 10 years, sells for $800, and is priced at a yield to maturity of 8%. If the YTM increases to 9%, what is the predicted change in price based on the bond’s duration? b. A 6% coupon b

> Briefly discuss what actions the U.S. Federal Reserve would likely take in pursuing an expansionary monetary policy using each of the following three monetary tools: a. Reserve requirements. b. Open market operations. c. Discount rate.

> An insurance company must make payments to a customer of $10 million in one year and $4 million in five years. The yield curve is flat at 10%. a. If it wants to fully fund and immunize its obligation to this customer with a single issue of a zero-coupon