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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’s current price is $80 per share. You purchase a derivative whose value to you becomes known a month from now. Specifically, let P be the price of the stock in a month. If P is between $75 and $85, the derivative is worth nothing to you. If P is less than $75, the derivative results in a loss of 100(75-P) dollars to you. (The factor of 100 is because many derivatives involve 100 shares.) If P is greater than $85, the derivative results in a gain of 100(P-85) dollars to you. Assume that the distribution of the change in the stock price from now to a month from now is
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Chapter 11 Solutions
Practical Management Science
- Which of the following statement is true? O For any type of derivatives, the payoffs will never be negative For any type of derivatives, the profit will never be negative There is no derivative that offers non-negative payoffs There is no derivative that offers non-negative profit All of the statements above are wrongarrow_forwardFind the accumulated value 28 years after the first payment is made of an annuity on which there are 5 payments of $200 each made at four year intervals. The nominal interest rate convertible semiannually is 6% Round your answer to two decimal places. 5130 14arrow_forwardYou have deposited $10,800 into an account that will earn an interest rate of 8% compounded semiannually. How much will you have in this account at the end of 10 years? $16,564.89 $27,213.75 $23,664.13 $28,396.96arrow_forward
- Why might a borrower prefer a fully amortizing loan over an adjustable-rate mortgage? О The monthly mortgage payment will remain constant throughout the term of the loan The principal and interest payment varies each month. The payment towards interest increases as the loan is amortized. The interest rate may increase over the term of the loanarrow_forwardA project does not necessarily have a unique IRR. (Refer to the previous problem for more information on IRR.) Show that a project with the following cash flows has two IRRs: year 1, 20; year 2, 82; year 3, 60; year 4, 2. (Note: It can be shown that if the cash flow of a project changes sign only once, the project is guaranteed to have a unique IRR.)arrow_forwardYour company is scheduled to receive 2, 000, 000 euros in 1 year. The euro is currently trading at 1.0813, you can borrow in the US for 1 year at 5.5% or invest in the US at 5.2%. You can borrow in euros at 3.6% or invest in euros at 3.3%. If you use a money market hedge on the receivable, how much will you get in US dollars?arrow_forward
- A certificate of deposit will often result in a penalty for withdrawing funds before the maturity date. If the penalty involves two months of interest, what would be the amount for early withdrawal on a CD worth $24,000 at 5 percent?arrow_forwardYou have just received a business valuation report that is dated six months ago. Describe the factors that might have changed during the past six months and, therefore, caused the value of the business today to be different from the value six months ago. Which of these changes affect the expected cash flows, and which affect the discount rate that you would use in a discounted cash flow valuation of this company?arrow_forwardPlease answer along with the excel formulas - 1. Sue now has $125. How much would she have after 8 years if she leaves it invested at 8.5% with annual compounding? $205.83 $216.67 $228.07 $240.08 $252.08 2. Suppose you have $1,500 and plan to purchase a 5-year certificate of deposit (CD) that pays 3.5% interest, compounded annually. How much will you have when the CD matures? $1,781.53 $1,870.61 $1,964.14 $2,062.34 $2,165.46 3. Last year Rocco Corporation's sales were $225 million. If sales grow at 6% per year, how large (in millions) will they be 5 years later? $271.74 $286.05 $301.10 $316.16 $331.96arrow_forward
- The usual face value for most corporate bonds is $5,000.; True or Falsearrow_forwardAn annuity pays $25,000 semiannually (every 6 months) for 12 years. An alternative investment’s APR is 10% with quarterly compounding. What is the value of this annuity?arrow_forwarduestion The company's bank won't lend it any more money than it already has, and investment bankers have said that debentures are out of the question. The treasurer has asked you to do some research and suggest a few ways in which bonds might be made attractive enough to allow the company to borrow. Explain how to secure the bonds with owned assets in great detial. In what ways does it make the bonds more attractive to allow the company to borrow?arrow_forward
- Practical Management ScienceOperations ManagementISBN:9781337406659Author:WINSTON, Wayne L.Publisher:Cengage,