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Finance Use the following information for qu...




Finance Use the following information for questions 1-4: Coca-Cola currently has a stock price of $42. It also has eight options available with the following Expiration Date, Strike Price (Exercise Price), and Option Price. For Example, you can buy a Sept 40 Call for $4.78 (or you could sell it for $4.78). The risk free rate between now and Sept is 2% while the risk free rate between now and Dec is 3%. Expiration Strike Discounted Call Put Month Price Value Price Price Sept 40 39.22 4.78 2 Sept 45 44.12 4 Dec 40 38.83 5.67 3.50 Dec 45 43.69 5 1. Suppose you sold the Dec 45 Put option and the stock price ends up being $41. How much is your total profit or loss (including the original sale of the option)? a) $1 loss b) $0 c) $1 profit d) $2 profit e) $3 profit 2. What is the Time Value of the Sept 40 Put option? a) $0 b) $1 c) $1.69 d) $2 e) $3 3. Using Put-Call Parity, what is the value of the Sept 45 Call option? a) $0.99 b) $1.88 c) $2.01 d) $2.12 e) $3.25 4. How could you earn a risk-free profit using the Dec 40 options? a) Buy the Stock and the Put, Sell the Bond and the Call b) Buy the Stock and the Call, Sell the Bond and the Put c) Buy the Bond and the Put, Sell the Stock and the Call d) Buy the Bond and the Call, Sell the Stock and the Put 5. If you __________, then you may be forced to buy the underlying stock. a) Buy a Call Option b) Buy a Put Option c) Sell a Call Option d) Sell a Put Option 5. Lower risk free rates results in __________ Put Option prices and ______ Call Option Prices. a) Higher, Higher b) Higher, Lower c) Lower, Lower d) Lower,Higher 6. Which Statement is correct? a. Dealers and Brokers make money by setting up transactions and are the go betweens in the derivatives market. b. A firm should always hedge in order to reduce risk whenever they can c. Speculators do not mind losing money as long as they are reducing their risk d. Dealers and Brokers try to find mispricings in the market where they can buy at a low price and simultaneously sell at a high price without taking on any risk. 7. Which statement regarding executive stock options is correct? a) They are short term and usually expire after one year. b) They should reduce agency costs by making managers act like shareholders c) They are included as compensation expense on the income statement. d) Managers can sell the options on an exchange 8. Which of the following statements are correct? a) Forward contracts are standardized and trade on an exchange b) Profits and Losses on Futures contracts are marked to market on a daily basis. c) Delivery of the assets almost never occurs in the forward market d) Futures contracts allow you to buy or sell individual stocks for a preset price on the expiration date. 9. Even if a firm has no assets or liabilities in foreign countries and has no cash flows denominated in foreign currencies, then it might still face ____________. a) Translation Exposure b) Transaction Exposure c) Economic Exposure d) Exchange Rate Exposure 10. Which of these should cause the dollar to appreciate? a) A decline in foreign demand for US goods and services b) An increase in US demand for foreign goods and services c) A decline in foreign demand for US financial assets d) A decline in US demand for foreign financial assets Use the following information for questions 11-14 Current Exchange Rates: $1.25 = 1 Euro and .625 Pounds = $1 Current one-year Inflation Rates: 6% in England, 2% in Europe, and 4% in the US 11. What is the exchange rate for Dollars per Pound? a) .5 dollars per pound b) .781 dollars per pound c) .8 dollars per pound d) 1.28 dollars per pound e) 1.6 dollars per pound 12. What should the cross rate be between Euros and Pounds? a) .5 pounds per euro b) .781 euros per pound c) .92 pounds per euro d) 1.28 euros per pound e) 2 euros per pound 13. If interest parity holds true, what is the expected exchange rate between euros and dollars one year from now? a) .637 Dollars per Euro b) .7846 Euros per dollar c) 1.2317 Dollars per Euro d) 1.2745 Euros per Dollar e) 1.57 Dollars per Euro 14. The Euro is expected to __________ against the Dollar and ____________against the Pound. a) Appreciate, Appreciate b) Appreciate, Depreciate c) Depreciate, Depreciate d) Depreciate, Appreciate 15. In order for the international parity conditions to hold, all countries must have the same _____________. a) Nominal Inflation Rate b) Nominal Risk-Free Interest Rate c) Real Exchange Rate d) Real Risk-Free Interest Rate 16. Which statement is FALSE? a. Interest Rate and Currency are two types of Swaps b. The two main types of derivatives are options and futures (or forwards) c. Collateralized Debt Obligations are basically insurance policies on debt d. The coupon rate on Inverse Floaters goes up when interest rates fall. 17. Which statement is TRUE? a. England has given up its own currency and uses the Euro b. If you are demanding a foreign currency, then you are willing to supply the domestic currency c. The effect of exchange rates on a firm is called synergy d. Interest Rate parity says that a country?s risk free rate is made up of their expected inflation and a real rate. e. The Japanese currency is called the Yuan 18. A(n) _____________ involves creating a new company out of part of your company and then selling shares of the new company to the public. a) Joint Venture b) Leveraged Buyout c) Stock Swap d) SpinOff 19. Which of these is a repellant used to avoid becoming a takeover target? a) Greenmail b) Pacman c) White Knight d) Golden Parachute 20. In a(n) ___________, the acquiring firm does not assume the liabilities of the target firm. a) Consolidation b) Stock Swap c) Equity Carveout d) Asset Purchase 21. Suppose that prior to a merger the stock price of the target company was $50 and the stock price of the acquiring company was $40. If the acquiring firm agrees to pay 1.5 share of their stock for every share of the target firms stock, then what premium are they offering? a) 10% b) 20% c) 25% d) 33% e) 50% 22. You need a barrel of oil next month. You could either buy the oil today and keep it for a month, wait and buy the oil next month when you need it, you could enter into a futures contract to buy oil at the current futures price $82, or you can pay $3 for a call option that gives you the right to buy oil for $80. The current spot price is $78 and the risk free rate is 2%, and carrying costs are $2. If the price ends up being $84 next month, then you should have ______________. a) Waited to buy the oil b) Entered into a futures contract c) Bought a call option d) Buy the oil today and store it for a month. 23. You just paid $3 for a call option that gives you the right to buy oil for $80. The current spot price is $78. If the price ends up being $84 next month, then what was your total profit or loss from buying the option? a) Lost $4 b) Lost $2 c) Made $1 d) Made $4 24. In the currency markets, $1 = 0.75 British pound and 1 Euro = $1.25. Wolverine Cola produces cherry cola in England at a cost of 0.9 British pound per unit. The product is sold in France for 1.5 euros. In terms of U.S. dollars, how much profit is Wolverine realizing on each unit sold? a. $0.37 b. $0.675 c. $0.875 d. $1.04 25. Which of the following statements is NOT CORRECT? a. Any bond sold outside the country of the borrower is called an international bond. b. Foreign bonds and Eurobonds are two important types of international bonds. c. Foreign bonds are bonds sold by a domestic borrower but denominated in a different currency than the country in which the issue is sold. d. The term Eurobond applies to any bonds that are denominated in a currency that differs from the country in which the issue is sold. 26. Which statement is FALSE? a. Hedging is when a company uses derivatives to reduce risk b. Derivatives are any security whose value depends on the value of some other asset c. The Futures Price changes everyday d. Forward contracts have less default risk than futures because the exchange acts as the counterparty for all trades e. Futures contracts are an agreement to either buy or sell an underlying asset for a prespecified price on a prespecified date. 27.Which Statement is FALSE? a. Synergy is when the combined company is worth more than individual parts b. Horizontal Mergers are between two competing firms while vertical mergers are between suppliers and customers c. A Leveraged Buyout is when a company sells a part of itself to another company d. Most Hostile takeovers are done through a tender offer. 28. Which statement is FALSE? a. Transaction Exposure is when the dollar price of the good may change due to changes in the exchange rate b. Floating exchange rates are determined by the supply and demand for the currency c. A multinational is a company that is located and operates in more than one company d. Dollarization is when a countries currency is floating e. An exchange rate is the price of one currency in terms of another. 29. Which Statement is FALSE? a. Time Value is the amount by which the price of an option exceeds its intrinsic value b. Time Value Decays over time c. The Strike Price is the price at which a call option holder can buy the underlying asset d. A decrease in the risk free rate is likely to lead to a decrease in the value of a put option e. The Time Value of an option is at its highest when the spot price equals the strike price 30. Which Statement is FALSE? a. An option is in the money as long as its intrinsic value is positive. b. The spot price is the price to buy or sell for immediate trade. c. The strike price of an option can change everyday d. The intrinsic value of a call option is either $0 or the Stock price ? Strike price, whichever is greater 31. Which statement is FALSE? a. Options sold without stock to back them up are called covered calls b. Situations in which aggregate (total) risk can be reduced by derivatives are called natural hedges c. The effect that exchange rate changes have on a firm is called Economic Exposure d. Speculating involves taking on risk in order to make money


Paper#1301 | Written in 18-Jul-2015

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