Question: On June 25, 2017, the futures price

> (a) Hedge funds earn a management fee plus an incentive fee that is a percentage of the profits, if any, that they generate (see Business Snapshot 1.3). How is a fund manager motivated to behave with this type of compensation package? (b) ‘‘Granting opti

> A company has granted 1,000,000 options to its employees. The stock price and strike price are both $20. The options last 10 years and vest after 3 years. The stock price volatility is 30%, the risk-free rate is 5%, and the company pays no dividends. Use

> A company uses delta hedging to hedge a portfolio of long positions in put and call options on a currency. Which of the following would give the most favorable result? (a) A virtually constant spot rate (b) Wild movements in the spot rate Explain your an

> A company has granted 2,000,000 options to its employees. The stock price and strike price are both $60. The options last for 8 years and vest after 2 years. The company decides to value the options using an expected life of 6 years and a volatility of 2

> What is the (risk-neutral) expected life for the employee stock option in Example 16.2? What is the value of the option obtained by using this expected life in Black–Scholes– Merton? Example 16.2 Suppose a company grants stock options that last 8 years

> The appendix derives the key result Show that and use this to derive the Black–Scholes–Merton formula for the price of a European put option on a non-dividend-paying stock. E[max(V – K, 0)] = E(V)N(dj) – KN(dz) %3D

> Consider an American call option when the stock price is $18, the exercise price is $20, the time to maturity is 6 months, the volatility is 30% per annum, and the risk-free interest rate is 10% per annum. Two equal dividends are expected during the life

> Assume that the stock in Problem 15.30 is due to go ex-dividend in 1 2/1 months. The expected dividend is 50 cents. (a) What is the price of the option if it is a European call? (b) What is the price of the option if it is a European put? (c) If the o

> Consider an option on a non-dividend-paying stock when the stock price is $30, the exercise price is $29, the risk-free interest rate is 5%, the volatility is 25% per annum, and the time to maturity is 4 months. (a) What is the price of the option if it

> A financial institution plans to offer a security that pays off a dollar amount equal to ST2 at time T, where ST is the price at time T of a stock that pays no dividends. (a) Use risk-neutral valuation to calculate the price of the security at time t in

> Suppose that observations on a stock price (in dollars) at the end of each of 15 consecutive weeks are as follows: 30:2; 32:0; 31:1; 30:1; 30:2; 30:3; 30:6; 33:0; 32:9; 33:0; 33:5; 33:5; 33:7; 33:5; 33:2 Estimate the stock price volatility. What is the s

> A stock price is currently $50. Assume that the expected return from the stock is 18% and its volatility is 30%. What is the probability distribution for the stock price in 2 years? Calculate the mean and standard deviation of the distribution. Determine

> A stock price is currently 50. Its expected return and volatility are 12% and 30%, respectively. What is the probability that the stock price will be greater than 80 in 2 years? (Hint: ST > 80 when ln ST > ln 80.)

> A stock whose price is $30 has an expected return of 9% and a volatility of 20%. In Excel, simulate the stock price path over 5 years using monthly time steps and random samples from a normal distribution. Chart the simulated stock price path. By hitting

> If
follows the geometric Brownian motion process in equation (14.6), what is the process followed by (a) y = 2S, (b) y=S2 , (c) y=eS, and (d) y=er(T-t)/S. In each case express the coefficients of dt and dz in terms of
rather than S.

> A company’s cash position, measured in millions of dollars, follows a generalized Wiener process with a drift rate of 0.1 per month and a variance rate of 0.16 per month. The initial cash position is 2.0. (a) What are the probability distributions of the

> Calculate the value of 9-month American call option to buy 1 million units of a foreign currency using a three-step binomial tree. The current exchange rate is 0.79 and the strike price is 0.80 (both expressed as dollars per unit of the foreign currency)

> A stock index is currently 990, the risk-free rate is 5%, and the dividend yield on the index is 2%. Use a three-step tree to value an 18-month American put option with a strike price of 1,000 when the volatility is 20% per annum. How much does the optio

> Footnote 1 of this chapter shows that the correct discount rate to use for the real-world expected payoff in the case of the call option considered in Figure 13.1 is 55.96%. Show that if the option is a put rather than a call the discount rate is 70:4%.

> Repeat Problem 13.25 for an American put option on a futures contract. The strike price and the futures price are $50, the risk-free rate is 10%, the time to maturity is 6 months, and the volatility is 40% per annum. Data from Problem 13.25: Consider a E

> A stock price is currently $30. During each 2-month period for the next 4 months it will increase by 8% or reduce by 10%. The risk-free interest rate is 5%. Use a two-step tree to calculate the value of a derivative that pays off
; 2, where ST is the st

> Using a ‘‘trial-and-error’’ approach, estimate how high the strike price has to be in Problem 13.22 for it to be optimal to exercise the option immediately. Data from Problem 13.22: A stock price is currently $40. Over each of the next two three-month pe

> A stock price is currently $40. Over each of the next two 3-month periods it is expected to go up by 10% or down by 10%. The risk-free interest rate is 12% per annum with continuous compounding. (a) What is the value of a 6-month European put option wit

> A stock price is currently $50. It is known that at the end of 6 months it will be either $60 or $42. The risk-free rate of interest with continuous compounding is 12% per annum. Calculate the value of a 6-month European call option on the stock with an

> Suppose that a central bank’s policy is to allow an exchange rate to fluctuate between 0.97 and 1.03. What pattern of implied volatilities for options on the exchange rate would you expect to see?

> The current price of a non-dividend-paying biotech stock is $140 with a volatility of 25%. The risk-free rate is 4%. For a 3-month time step: (a) What is the percentage up movement? (b) What is the percentage down movement? (c) What is the probability of

> A bank decides to create a five-year principal-protected note on a non-dividend-paying stock by offering investors a zero-coupon bond plus a bull spread created from calls. The risk-free rate is 4% and the stock price volatility is 25%. The low-strike-pr

> Describe the trading position created in which a call option is bought with strike price K2 and a put option is sold with strike price K1 when both have the same time to maturity and K2 > K1. What does the position become when K1 ¼ K2.

> Suppose that the price of a non-dividend-paying stock is $32, its volatility is 30%, and the risk-free rate for all maturities is 5% per annum. Use DerivaGem to calculate the cost of setting up the following positions: (a) A bull spread using European ca

> Three put options on a stock have the same expiration date and strike prices of $55, $60, and $65. The market prices are $3, $5, and $8, respectively. Explain how a butterfly spread can be created. Construct a table showing the profit from the strategy.

> Consider a put option on a non-dividend-paying stock when the stock price is $40, the strike price is $42, the risk-free interest rate is 2%, the volatility is 25% per annum, and the time to maturity is three months. Use DerivaGem to determine the follow

> Consider an option on a stock when the stock price is $41, the strike price is $40, the risk-free rate is 6%, the volatility is 35%, and the time to maturity is 1 year. Assume that a dividend of $0.50 is expected after 6 months. (a) Use DerivaGem to valu

> You are the manager and sole owner of a highly leveraged company. All the debt will mature in 1 year. If at that time the value of the company is greater than the face value of the debt, you will pay off the debt. If the value of the company is less than

> What is the result corresponding to that in Problem 11.26 for European put options?

> Suppose that c1, c2, and c3 are the prices of European call options with strike prices K1, K2, and K3, respectively, where K3 > K2 > K1 and K3 K2 ¼ K2 K1. All options have the same maturity. Show that
(Hint: Consider a portfolio that is long one opt

> A trader buys two July futures contracts on frozen orange juice concentrate. Each contract is for the delivery of 15,000 pounds. The current futures price is 160 cents per pound, the initial margin is $6,000 per contract, and the maintenance margin is $4

> A European call option and put option on a stock both have a strike price of $20 and an expiration date in 3 months. Both sell for $3. The risk-free interest rate is 10% per annum, the current stock price is $19, and a $1 dividend is expected in 1 month.

> The prices of European call and put options on a non-dividend-paying stock with an expiration date in 12 months and a strike price of $120 are $20 and $5, respectively. The current stock price is $130. What is the implied risk-free rate?

> Calls were traded on exchanges before puts. During the period of time when calls were traded but puts were not traded, how would you create a European put option on a nondividend- paying stock synthetically.

> On July 20, 2004, Microsoft surprised the market by announcing a $3 dividend. The exdividend date was November 17, 2004, and the payment date was December 2, 2004. Its stock price at the time was about $28. It also changed the terms of its employee stock

> Use DerivaGem to calculate the value of an American put option on a non-dividendpaying stock when the stock price is $30, the strike price is $32, the risk-free rate is 5%, the volatility is 30%, and the time to maturity is 1.5 years. (Choose ‘‘Binomial

> ‘‘If a company does not do better than its competitors but the stock market goes up, executives do very well from their stock options. This makes no sense.’’ Discuss this viewpoint. Can you think of alternatives to the usual employee stock option plan th

> A trader writes 5 naked put option contracts with each contract being on 100 shares. The option price is $10, the time to maturity is 6 months, and the strike price is $64. (a) What is the margin requirement if the stock price is $58? (b) How would the a

> Calculate the intrinsic value and time value from the mid-market (average of bid and offer) prices for the September call options in Table 1.2. Do the same for the September put options in Table 1.3. Assume in each case that the current mid market stock

> Suppose that the structure in Figure 8.1 is created in 2000 and lasts 10 years. There are no defaults on the underlying assets until the end of the eighth year when 17% of the principal is lost because of defaults during the credit crisis. No principal i

> Suppose that the term structure of risk-free interest rates is flat in the United States and Australia. The USD interest rate is 7% per annum and the AUD rate is 9% per annum. The current value of the AUD is 0.62 USD. Under the terms of a swap agreement,

> Suppose that you own 5,000 shares worth $25 each. How can put options be used to provide you with insurance against a decline in the value of your holding over the next 4 months?

> Company A, a British manufacturer, wishes to borrow U.S. dollars at a fixed rate of interest. Company B, a U.S. multinational, wishes to borrow sterling at a fixed rate of interest. They have been quoted the following rates per annum: (Rates have been ad

> A portfolio manager plans to use a Treasury bond futures contract to hedge a bond portfolio over the next 3 months. The portfolio is worth $100 million and will have a duration of 4.0 years in 3 months. The futures price is 122, and each futures contract

> A Canadian company wishes to create a Canadian LIBOR futures contract from a U.S. Eurodollar futures contract and forward contracts on foreign exchange. Using an example, explain how the company should proceed. For the purposes of this problem, assume th

> Assume that a bank can borrow or lend money at the same interest rate in the LIBOR market. The 90-day rate is 10% per annum, and the 180-day rate is 10.2% per annum, both expressed with continuous compounding and actual/actual day count. The Eurodollar f

> It is March 10, 2017. The cheapest-to-deliver bond in a December 2017 Treasury bond futures contract is an 8% coupon bond, and delivery is expected to be made on December 31, 2017. Coupon payments on the bond are made on March 1 and September 1 each year

> A Eurodollar futures quote for the period between 5.1 and 5.35 years in the future is 97.1. The standard deviation of the change in the short-term interest rate in one year is 1.4%. Estimate the forward interest rate in an FRA.

> The December Eurodollar futures contract is quoted as 98.40 and a company plans to borrow $8 million for three months starting in December at LIBOR plus 0.5%. (a) What rate can the company lock in by using the Eurodollar futures contract? (b) What positi

> A Treasury bond futures price is 103-12. The prices of three deliverable bonds are 115-06, 135-12, and 155-28. Their conversion factors are 1.0679, 1.2264, and 1.4169, respectively. Which bond is cheapest to deliver?

> A company enters into a forward contract with a bank to sell a foreign currency for K1 at time T1. The exchange rate at time T1 proves to be S1 (> K1). The company asks the bank if it can roll the contract forward until time T2 (> T1) rather than settle

> You would like to speculate on a rise in the price of a certain stock. The current stock price is $29 and a 3-month call with a strike price of $30 costs $2.90. You have $5,800 to invest. Identify two alternative investment strategies, one in the stock a

> What is the difference between a long forward position and a short forward position?

> For which funds are budgetary comparison schedules or statements required? Should the actual revenues and expenditures on the budgetary comparison schedules be reported on the GAAP basis? Why or why not?

> Distinguish among appropriations, allotments, expenditures, encumbrances, and expenses.

> Explain the essential differences between revenues and other financing sources and between expenditures and other financing uses. How is each of these items reported on the governmental funds statement of revenues, expenditures, and changes in fund b

> Describe the format prescribed by the GASB for the government-wide statement of activities and how that format benefits financial statement users.

> In relation to the government-wide statement of activities, define direct expenses and indirect expenses and why it is important to distinguish between them.

> Explain the different purposes of the fund-based and government-wide financial statements of a state or local government and the primary differences between the fund-based and government-wide operating statements.

> Identify the fund balance classifications and give an example of what might be included in each classification identified.

> What is meant by the terms deferred outflows of resources and deferred inflows of resources? When are these accounts used?

> What are the three categories of funds prescribed by GASB standards and which fund types are included in each? Which basis of accounting is used by each category?

> Identify the criteria for determining if a governmental or enterprise fund must be reported as a major fund. What other funds should or may be reported as major funds?

> For each characteristic, concept, or financial reporting requirement listed on the next page, place a Y for yes in the type of organization column if the item applies to that type of organization or N for no if it does not apply. To answer some of the it

> Identify and briefly describe the three broad categories of service activities that most general purpose governments perform.

> A not-for-profit organization is required to report expenses incurred for programs separately from management and general expenses and fund-raising costs. Explain who would use this information and why this separation matters.

> Identify and describe the four sections of a federal department or agency’s performance and accountability report.

> Proprietary fund accounting is more like for-profit accounting than the accounting for any other category of fund. Explain why you think this is the case, using the two types of proprietary funds as examples.

> What is the primary financial reporting objective for not-for-profit organizations? How does this differ from the primary financial reporting objective for a government?

> Explain the purpose of operational accountability and the purpose of fiscal accountability. Which category of financial statements is most useful in reporting on each of these accountability concepts?

> What is the primary reason that governmental entities need to use funds for financial reporting? How are funds established?

> The Beth House Museum is a nongovernmental not-for-profit organization. At the annual meeting, one of the new board members said, “I took a couple of accounting classes in college and we can choose to use either the FASB rules or the GASB rules.” Do you

> Explain the modified accrual basis of accounting. Why is it used for governmental fund financial statements?

> Describe how the reporting objectives for government-wide and governmental fund financial statements are different.

> Choose the best answer. 1. Which of the following is a special purpose government? a. The State of Arkansas. b. Greene County. c. Rutgers University. d. Seattle, Washington. 2 Which of the following is not a distinguishing difference between government

> Identify some differences between business organizations and government/ not-for-profit organizations.

> The pre-closing trial balance for the Chance County Woodland Park Capital Projects Fund is provided on the next page. Required: a. Prepare the June 30, 2017, statement of revenues, expenditures, and changes in fund balances for the capital projects fu

> In Fulbright County, the Culture and Recreation Department constructed a library in one of the county’s high growth areas. The construction was funded by a number of sources. Below is selected information related to the Library Capital Project Fund. All

> On July 20, 2017, the building occupied by Sunshine City’s Culture and Recreation Department suffered severe structural damage as a result of a hurricane. It had been 48 years since a hurricane had hit the Sunshine City area, although hurricanes in Sunsh

> The City of Rochester signed a 30-year agreement with East Coast Real Estate, Inc. to lease a newly constructed building for city services. The city agrees to make an initial payment of $1,000,000 and annual payments of $809,375 for the next 29 years. Us

> Carmel County has prepared the following schedule related to its capital asset activity for the fiscal year 2017. Carmel County has governmental activities only, with no business-type activities. Required: a. Does the above capital asset footnote discl

> In 2017, Riverside began work on an outdoor amphitheater and concession stand at the city’s park. It is to be financed by a $3,500,000 bond issue and supplemented by a $500,000 General Fund transfer. The following transactions occurred in 2017: 1. The Ge

> The following transactions affected various funds and activities of the Town of Big Springs. 1. The Fire Department, a governmental activity accounted for within the General Fund, purchased $100,000 of water from the Water Utility Fund, an enterprise fun

> The following transactions occurred during the 2017 fiscal year for the City of Evergreen. For budgetary purposes, the city reports encumbrances in the Expenditures section of its budgetary comparison schedule for the General Fund but excludes expenditur

> The City of Waterville applied for a grant from the state government to build a pedestrian bridge over the river inside the city’s park. On May 1, 2017, the city was notified that it had been awarded a grant of up to $200,000 for the project. The state w

> For this exercise refer to the Denver government-wide statement of net position (p . 40 ), the Denver government-wide statement of activities (p.42), the American Diabetes Association balance sheet (p. 528) , and the American Diabetes Association stateme

> At the end of fiscal year 2017, the City of Columbus General Fund pre-adjusting trial balance showed the following balances for operating and budgetary accounts and fund balance accounts. he City of Columbus uses the purchases method of accounting for

> The City of Troy collects its annual property taxes late in its fiscal year. Consequently, each year it must finance part of its operating budget using tax anticipation notes. The notes are repaid upon collection of property taxes. On April 1, 2017, the

> On July 1, 2017, the beginning of its fiscal year, Ridgedale County recorded gross property tax levies of $4,200,000. The county estimated that 5 percent of the taxes levied would be uncollectible. As of April 30, 2018, the due date for all property taxe

> During fiscal year 2017, the City of Hickory Hills issued purchase orders to various vendors in the amounts shown for the following functions of the city: General Government…………………………………..$ 164,200 Public Safety………………………………………………..302,000 Public Works……

> Jacqueline Ponce de Leon, a descendent of Juan Ponce de Leon, made a cash contribution of $1,500,000 to the City of Fountains to create and maintain a large dramatic fountain in front of City Hall in honor of her ancestor. For accounting purposes, the ci

> The City of Hinton’s General Fund had the following post-closing trial balance at April 30, 2016, the end of its fiscal year: During the year ended April 30, 2017, the following transactions, in summary form, with subsidiary ledger de

> The Town of Willingdon adopted the following General Fund budget for fiscal year 2017: Estimated revenues: Taxes………………………………………………….…. $15,000,000 Intergovernmental revenues………………………1,000,000 Licenses and permits………………

> On February 15, 2016, the Town of Evergreen police chief’s administrative assistant is preparing a purchase order to place an order for a new computer. The computer is estimated to cost $1,600. Prior to submitting the purchase order, he

> The following information is provided about the Town of York’s General Fund operating statement and budgetary accounts for the fiscal year ended September 30, 2016. (Note: The town has no restricted, committed, or assigned fund balances.) Estimated reve