Questions and Answers of Financial Trading And Investing

For each of the following three scenarios, would you rather:a. Receive $$100$ in one month or $$100$ in two months (most people prefer the former)?b. Be given an excellent meal at a nice
Consider an extension of the Exercise 21 from Chapter 8 concerned with the management of transactions exposure. The Smedley Company sold products to a Japanese client for ¥15,000,000. Payment is due
A stock currently selling for $$50$ has an annual returns variance equal to 0.36. The riskless return rate equals 0.08 per year. Under the binomial framework, what would be the value of nine-month
Consider the following exercise concerned with management of transactions exposure. The Smedley Company has sold products to a Japanese client for ¥15,000,000. Payment is due six months later.
Assume that $1 will purchase £0.60 and ¥108; that is, 1 U.S. dollar will purchase 0.6 UK pounds and 108 Japanese yen. Assume that goods in the three countries are identically priced after adjusting
Bond A, a three-year 7% issue, currently sells for 964.3227. Bond B is a two-year 8% issue currently selling for 1010.031. Bond C is a three-year 6% issue currently selling for 938.4063. Based on
Summarize how we learn and use essential skills for career success.
Suppose that the one-year spot rate y0,1 of interest is 5%. Investors are expecting that the one-year spot rate one year from now will increase to 7%; thus, the one-year forward rate y1,2 on a loan
The Designated Market Maker (DMM) on the NYSE has received the following bids, each to purchase 100 shares of XYZ stock at the market open: 9.98, 9.99, 10.00, 10.01, 10.02, and 10.03. She has
a. Some lawyers and economists have argued that legalizing insider trading would benefit markets by allowing insiders to disseminate information through their own trading activity. Prepare an
In response to the Financial Crisis of 2007-09, Congress passed major financial system regulatory reforms known as the Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010. What were
Some people commented that the Securities Act of 1933 was based on the “sunlight theory of regulation,” which is analogous to others saying that “those who are forced to undress in public will
Now, let’s consider martingale and Markov processes in a standard Blackjack game. Cards are dealt one at a time from a standard 52-card randomly shuffled deck, and points are awarded to the lone
Let {rV, t ≥ 0} (the return on a stock) be an arithmetic Brownian motion.a. Suppose that rt is made up of two components, an instantaneous drift with expected value μ = .05 and a variance σ2 =
Historical percentage stock returns for the Robinson and Boyer Companies are listed in the following chart along with percentage returns on the market portfolio: Calculate the following based on the
Suppose a stock price St follows a Brownian motion process with an initial price of S0 = $50 and a variance per time period equal to σ2 = 4. What is the probability that the stock price is less
The following table represents outcome numbers, probabilities, and associated returns for Stock A:Thus, there are 10 possible return outcomes for Stock A.a. What is the probability associated with
The Nettles Company management projects an expected return level of 15% for the upcoming year. Assuming that returns are normally distributed with a standard deviation equal to. 1, what is the
Torre Company stock realized a 52-week high of $50 per share and a 52-week low of $25. What is the Parkinson extreme value estimate for variance for this stock? What would be the corresponding
Suppose that there is a six-month call currently trading for $8.20 while its underlying stock is currently trading for $75. Other details for this example are as follows:T = 0:5 rf = 0.10 c0 = 8.20 X
Santo Company stock currently trades for $50 per share. The current riskless return rate is 0.06. Under the Black-Scholes framework, what would be the standard deviations implied by six-month (0.5
In principle, simultaneous execution of transactions at known prices producing offsetting future cash flows makes arbitrage riskless. However, in practice, even in the simplest scenarios, such
There are two three-year bonds with face values equaling $1000. The coupon rate of bond A is 0.05 and 0.08 for bond B. A third bond C also exists, with a maturity of two years. Bond C also has a face
A $1000 face value bond is currently selling at a premium for $1200. The coupon rate of this bond is 12% and it matures in three years. Calculate the following for this bond assuming that its
Work through each of the calculations in Problem 2 assuming that interest payments are made semiannually.Data from Problem 2A $1000 face value bond is currently selling at a premium for $1200. The
A life insurance company expects to make payments of $30,000,000 in one year, $15,000,000 in two years, $25,000,000 in three years, and $35,000,000 in four years to satisfy claims of policyholders.
Find the duration of the following pure discount bonds:a. $1000 face value bond maturing in one year currently selling for $900.b. $1000 face value bond maturing in two years currently selling for
What is the relationship between the maturity of a pure discount bond and its duration?
What is the duration of a portfolio consisting of one of each of the bonds listed in problem 7?Data from problem 7Find the duration of each of the following $1000 face value coupon bonds assuming
Find durations and convexities for each of the following bonds:a. 10% five-year bond selling for $1079.8542 yielding 8%b. 12% five-year bond selling for $1000 yielding 12%
a. Use the duration (first-order) approximation models to estimate bond value increases induced by changes in interest rates (yields) to 10% for each of the bonds in Problem 10 above.b. Use the
Consider an example where we can borrow money today for one year at 5%; y0,1= 0.05. Suppose that we are able to obtain a commitment to obtain a one-year loan one year from now at an interest rate of
Suppose that the one-year spot rate y0,1 of interest is 5%. Investors are expecting that the one-year spot rate one year from now will increase to 6%; thus, the one-year forward rate y1,2 on a loan
Assume that there are two three-year bonds with face values equaling $1000. The coupon rate of Bond A is 0.05 and 0.08 for Bond B. A third Bond C also exists, with a maturity of two years. Bond C
Suppose we expected that PPP should hold between the United States and Canada. Assume that the exchange rate between U.S. dollars and Canadian dollars is CAD1/ USD0.64. That is, one Canadian dollar
Consider a case involving three currencies concerning cross rates of exchange. Assume that 1.5 Swiss francs are required to purchase 1 U.S. dollar and that 0.64 U.S. dollars are required to purchase
Some observers of derivatives markets agree that publicly traded corporations can use derivatives to mitigate operating risks but that shareholders would be better off if managers simply allowed
Consider a one-time-period, two potential outcome framework where there exists Company Q stock currently selling for $50 per share and a riskless $100 face value T-Bill currently selling for $90.
Rollins Company stock currently sells for $12 per share and is expected to be worth either $10 or $16 in one year. The current riskless return rate is 0.125. What would be the value of a one-year
Evaluate each of the European options in the series on ABC Company stock. Prices for each of the options are listed in the table. Determine whether each of the options in the series should be
Ibis Company stock is currently selling for $50 per share and has a multiplicative upward movement equal to 1.2776 and a multiplicative downward movement equal to 0.7828. What is the value of a
Stanton Company stock is trading for 50 in a two-time-period environment, with each relevant time period lasting 6 months. The stock might increase by exactly 20% in just one period or perhaps in
Kestrel Company stock is currently selling for $40 per share. Its historical standard annual deviation of returns is 0.5 in this single-period environment. The one-year Treasury bill rate is
What is the gamma of a long position in a single futures contract? Why?
Tanker Company stock currently sells for 30 per share and has an anticipated volatility (annual return standard deviation) equal to 0.6. Three-month (0.25 year) call options are available on this
Tanker Company stock, which currently sells for 30 per share and has an anticipated volatility (annual return standard deviation) equal to 0.6, also has a three-month (0.25 year) call option with an
A currency option series on Australian dollars (AUD) denominated in U.S. dollars. Suppose that a two-year call option is available on AUD with an exercise price equal USD0.65. The U.S. interest rate
Suppose that right now, the market price of one Chinese yuan (CNY) is USD0.15; that is, one can purchase or sell CNY1.00 for USD0.15. The proportional standard deviation for CNY in terms of USD is
Suppose that we wished to compute monthly returns for Fund A over a period of five months. We collect relevant end-of-month NAVs along with any dividends. The following table lists NAV’s and
On February 1, a hedge fund-initiated activities with a trading account of $1,000,000 and 20,000 outstanding shares of stock. On January 2, the fund realized $30,000 in trading profits. On February
Historical returns for the Ripco Fund and the market portfolio along with Treasury bill (T-Bill) rates (rf) are summarized in the following table:a. Calculate the fund beta over the 20-year period.b.
The following table provides historical percentage returns for the Patterson and Liston Funds along with percentage returns on the market portfolio (index or fund):Suppose that the riskless rate of
Suppose that the market for Stock X on a given date consisted of the transactions listed in the following table. The left two columns represented transactions for Stock X, excluding the broker’s
Many analysts argue that the Sharpe ratio is a more appropriate performance metric for an investor’s overall portfolio than for a given segment or sector of her portfolio. Prepare a statement to
a. On what factors does implementation shortfall depend? That is, what affects the various types of implementation costs?b. Why might increasing the speed at which a large transaction is executed
A fund manager decided to purchase 1000 shares of General Statics stock after the market closed with a price of 20. The fund manager placed a limit order at 20.15 to buy 1000 shares before the market
A small trading firm has a securities portfolio with a current value equal to $80,000,000. The portfolio’s returns tend to be normally distributed with a 1% daily standard deviation and
The VaR method can be applied to individual or institutional investment portfolios. For example, suppose that you have a $100,000 asset portfolio for which you seek to compute VaR. The portfolio
What are the most essential criticisms of the VaR method as an indicator of stress of a financial institution (or unit thereof)?
An investor has combined securities X, Y, and Z into a portfolio. He has invested $1000 in Security X, $2000 into Security Y, and $3000 into Security Z. Security X has an expected return of 10%;
Three traders are at lunch and must decide on a dessert that they will share. Consider the following table, which compares trader preferences for three types of desserts, all ranked according to
Suppose that an investor with $2 in capital has a logarithmic utility of wealth function: U = ln(ω). The investor has the opportunity to buy into the gamble described in the St. Petersburg paradox.
A car with a replacement value of $20,000 can be insured against a total loss with an insurance policy sold for a premium of $1200. The insurance company selling the policy and the consumer
Suppose that you are presented with the following choice:I. In addition to whatever you own, you have been given $1000. You are now asked to choose between:A: A sure gain of $500 B: A 50% change to
Suppose that you were to perform an experiment on subjects to determine whether they prefer to have coffee mugs or money. You plan to use a large representative sampling of individuals and endow half
Churches, schools, and other nonprofit institutions have held jelly bean counting contests where contestants compete for a prize by estimating the number of jelly beans in a large jar. There is
In our discussion of prospect theory, we considered the following choice of gambles:Gamble A: 0.33 probability of receiving 2500, 0.66 of receiving 2400, and 0.01 of receiving 0 Gamble B: 100%
Suppose that the United States is preparing for the outbreak of an Asian viral disease, which, if a vaccine is not developed, is expected to kill 600 people. Two alternative vaccination programs have
Suppose that an investor has the opportunity (and funding ability) to pay $100,000 for a 50% chance to win $300,000 and a 50% chance of winning nothing.a. What is the expected value of the gamble?b.
If price changes reflect new information, why should returns fluctuate randomly?
Consider the following stock price sequence:Compute three-day moving averages for days 3, 4, and 5. If one assumes that the three-day moving average price represents the true value of the stock
Compute five-day moving averages for each date of the following series, assuming that 5 is the price for day 1 and 18 is the price for day 12: 5 6 5 СЛ 6 8 10 9 12 15 12 16 18
Toy stores have very clear seasonal patterns in their revenue flows. Should toy store company share prices exhibit similar seasonality?
An analyst has tested the effect of spin-off announcements on share prices using event study methodology. The analyst’s procedure proceeded as follows:a. Ten spin-offs were obtained from the most
Suppose that we wished to conduct an event study on whether acquiring firms experience share price reactions to takeover announcements. For our event study, we will use for our sample the following
The following table reflects abnormal returns for each of 10 stocks over a seven-day period about day zero, which is the standardized date of the sudden death of the CEO for each of the 10 firms. An
Which is worth more?a. A market forecasting service that correctly predicts the direction of the market portfolio with 100% consistency every month for extended periods of time and can be expected to
The Hollywood Stock Exchange (www.hsx.com) has described itself as “the world’s leading entertainment stock market.” The site has been owned by Cantor Fitzgerald, one of the world’s leading
In Chapter 6, we discussed a simple dual market setting involving trading of English securities in 18th-century London markets and simultaneously in Amsterdam markets.Information would be revealed on
Describe why it is difficult to manipulate security prices in a well-developed and liquid market.
a. Most markets, including those for labor, commodities, and real estate, allow insider trading activity. Transactions in these markets are routinely based on unequally distributed information. Why
Does insider trading violate the Securities Act of 1933? If so, what section? If not, why not?
In a release dated November 5, 2001, the SEC announced an action against Israel Shenker. In this announcement, the SEC provided the following description of a series of transactions executed by
In the chapter, we discussed a number of problems in markets that arise from legal practices and norms, but might be worthy of discussion by regulators. Consider the following issues:a. Payment for
In Section 13.7, we discussed the need for trading firms to question and more closely examine “traders working unusually long hours and working into the late night,” and to ensure that traders
Many observers of the market, including Michael Lewis, author of the book Flash Boys, have accused HFT firms of front-running by observing order flow to the market and using those orders and their
How might retail clients of brokers benefit from payment for order flow?
The following table presents sample daily historical price data for a stock whose returns are given in the third column.a. Based on a traditional sample estimator, calculate a daily variance
The following daily prices were collected for each of three stocks over a 12-day period.Based on the data given above, calculate the following:a. Returns for each day on each of the three stocks.
a. Suppose that stock price changes in a given market from transaction to transaction are clearly and statistically inversely correlated, bouncing between prices in a definable range. Is it more
Based on models described in this chapter, why does the dealer spread widen as the uncertainty associated with the relevant security increases?
This exercise is related to a trading practice called quote matching, which occurs when a small trader places an order one uptick (downtick) from that of a large trader so as to profit from the large
Suppose that dealer inventory costs were the sole source of the dealer spread. Further suppose that a transaction was executed at the bid. Would subsequent bid and offer quotes tend to be higher or
Describe how transaction costs will tend to increase inverse correlations between trade-to-trade transaction prices.
Suppose that a dealer with $20,000 in capital and zero stock inventory has a logarithmic utility of wealth function: U5ln(W).a. Assuming a small risk (the Arrow-Pratt model, as used by Stoll, 1978),
Based on his estimates of the risk of a security, a trader believes that the price of a stock traded in a dealer market will fall within a $3 range, with potential prices being uniformly distributed.
a. In the Glosten and Milgrom Information Asymmetry Model, are dealer spreads greater if all traders (excluding the dealer) are fully informed and know what prices will be or if all traders are
In the Glosten and Milgrom (1985) model, dealer spreads will tend to be smaller when arrivals of buy and sell orders are balanced. Why do such balanced order arrivals tend to produce smaller dealer
We saw in Chapter 4 that in a statistical study of stock market data, Barclay and Warner (1993) found that very small trades and the very large trades did not have a significant impact on stock
An informed trader has private information that the value of a stock is $100 per share. Without this information, the variance of payoffs on the stock would be $60; this is the level of payoff

Showing 1 - 100 of 164