Understanding Financial Statements 8th Edition Lyn M Fraser, Aileen Ormiston - Solutions

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4. You are going to use binomial trees to value American-style options on the British pound.Assume that the British pound is currently worth $1.40. Volatility is 10%. The current British risk-free rate is 5%, and the US risk-free rate is 2%. The put option has a strike price of $1.50.It expires in
3. Suppose the stock discussed in Exercise 1 pays dividends. Assume all parameters are the same.Consider three forms of dividends paid by the firm:a. The stock pays a continuous, known stream of dividends at a rate of 4% per time.b. The stock pays 5% of the value of the stock at the third node. No
2. Suppose you are given the following data:The risk-free interest rate is 6%.The stock price follows:dSt 5 μSt dt 1 σSt dWt (8.83)Volatility is 12% a year.The stock pays no dividends and the current stock price is 100.Using these data, you are asked to approximate the current value of a European
1. Consider the immunization example given in Section 8.4. Assume that the zero-coupon yield curve is flat at y 5 5% and not 8% as in the example. The shifts in the yield curve are parallel.What positions and how many units of the 6-month bond and the 3-year bond are needed to create an approximate
3. Consider the oil calendar swap example provided in the text. Table 7.5 provided the swap curve derived from the futures curve. To calculate the mark-to-market value of the swap and its “fair price,” we just require information about the discount factor or yield curve. Assume the following
2. Consider the JPMorgan heating oil example in the text of this chapter. We calculated the expected profit from the spot oil purchases and forward sale after making assumptions about borrowing and storage costs. Now assume that storage costs are toward the upper end of the range provided in the
1. In this question we consider a gold miner’s hedging activities.a. What is the natural position of a gold miner? Describe using payoff diagrams.b. How would a gold miner hedge her position if gold prices are expected to drop steadily over the years? Show using payoff diagrams.c. Would this
8. Suppose the quoted swap rate is 5.06/5.10. Calculate the amount of fixed payments for a fixed payer swap for the currencies below in a 100 million swap.USD.EUR.Now calculate the amount of fixed payments for a fixed receiver swap for the currencies below in a 100 million swap.JPY.GBP.
7. A treasurer in Europe would like to borrow USD for 3 months. But instead of an outright loan, the treasurer decides to use the repo market. The company has holdings of EUR40 million bonds. The treasurer uses a cross-currency repo.
6. Consider a 2-year currency swap between USD and EUR involving floating rates only.The EUR benchmark is selected as 6-month Euro LIBOR, the dollar benchmark is 6-month BBA LIBOR. You also have the following information:Notional amount 5 USD10;000;000 Exchange rate EUR=USD 5 0:84a. Show the cash
5. Foreigners buying Australian dollar instruments issued in Australia have to pay withholding taxes on interest earnings. This withholding tax can be exploited in tax-arbitrage portfolios using swaps and bonds. First let us consider an episode from the markets related to this issue.
4. Going back to the previous exercise, suppose you are given, in addition, data on FRAs both for USD and for EUR. Also suppose you are looking for arbitrage opportunities. Would these additional data be relevant for you? Discuss briefly.
3. Suppose at time t 5 0, we are given prices for four zero-coupon bonds (B1, B2, B3, B4) that mature at times t 5 1, 2, 3, and 4. This forms the term structure of interest rates.We also have the one-period forward rates (f0, f1, f2, f3), where each fi is the rate contracted at time t 5 0 on a loan
2. You are hired by a financial company in New Zealand and you have instant access to markets. You would like to lock in a 3-month borrowing cost in NZ$ for your client. You consider a NZ$ 1 3 4 FRA. But you find that it is overpriced as the market is thin.So you turn to Aussie. A$ FRAs are very
1. Today is March 1, 2004. The day-count basis is actual/365. You have the following contracts on your FX book.CONTRACT A: On March 15, 2004, you will sell 1,000,000 EUR at a price F1 t dollars per EUR.CONTRACT B: On April 30, 2004, you will buy 1,000,000 EUR at a price F2 t dollars per EUR.a.
8. Explain how CTD bonds are determined. For needed information go to Web sites of futures exchanges.
7. Could taking a carefully chosen position in the relevant maturity FRA, offset the losses that shorts have suffered?Explain carefully.
6. Would an asset swap (e.g., swapping LIBOR against the relevant bond mentioned in the paper) have helped the shorts? Explain.
5. Why are penalties for failure to deliver relevant?
4. What is the importance of the size of ’05 Bund issue? How do traders “rustle up” such bonds to be delivered?
3. What is DB’s position aiming for?
2. Put this together with DB’s position in the repo market.
1. What is a calendar spread? Show DB’s position using cash flow diagrams.
4. A dealer wants to borrow $10 million using a bond repo but due to certain market restriction he cannot repo out the bond for 2 months.a. Suggest a strategy so that he can borrow the cash for the period without losing the permanent ownership of the bond.b. Calculate the forward price of bond
3. A dealer repos $10 million T-bills. The haircut is 5%. The parameters of the deal are as follows:T-bill yield: 2%Maturity of T-bills: 90 days Repo rate: 2.5% term: 1 weeka. How much cash does the dealer receive?b. How much interest will be paid at the end of the repo deal?
2. A dealer needs to borrow EUR 30 million. He uses a Bund as collateral. The Bund has the following characteristics:Collateral 4.3% Bund, June 12, 2004 Price: 100.50 Start date: September 10 Term: 7 days Repo rate: 2.7%Haircut: 0%a. How much collateral does the dealer need?b. Two days after the
1. Suppose you are a newly employed investment banker and you find that your bank got stuck in a deal where it has to deliver a bond to close a short future position. The bond has just gone “special” and you do not own it yet. What strategy do you suggest to address this situation and avoid a
3. You are a swap dealer and you have the following deals on your book:Long 2-year receiver vanilla interest-rate swap, at 6.75% p.a. 30/360. USD N 5 50 million.3-year receiver vanilla interest-rate swap, at 7.00% p.a. 30/360. USD N 5 10 million.Short 5-year receiver vanilla interest-rate swap, at
2. Read the following episode carefully.Italian Asset Swap Volumes Soar on Buyback Plans, Volumes in the basis-swap spread market doubled last week as traders entered swaps in response to the Italian treasury’s announcement that it “does not rule out buybacks.”Traders said the increase in
1. On March 3, 2000, the Financial Accounting Standards Board, a crucial player in financial engineering problems, published a series of important new proposals concerning the accounting of certain derivatives.34 It is known as Statement 133 and affects the daily lives of risk managers and
11. Barbell example.On June 16, 2014, a fund manager is considering the purchase of $1 million face amount of US Treasury 1 1 2s with a maturity date of May 31, 2019 at a cost of 990,468.75. The manager examines the bond further and, using his Bloomberg terminal, notices that the bond has a yield
10. Using the following bond price data calculate the 3 3 6, 6 3 9, 3 3 9 and 6 3 12 FRA rates.Bðt0; t1Þ 5 98:79; Bðt0; t2Þ 5 97:21; Bðt0; t3Þ 5 95:84; Bðt0; t4Þ 5 93:82
9. Assume the Eurodollar futures price at time t0 is 93.83 and the contract expires in 3 months timea. Calculate the 3-month forward rate implied by this price.b. Calculate the repayment amount for bonds with maturities of 3, 6, 9 and 12 months if the investor bought $5 million future contracts.
8. Determine the dollar settlement of the 3 3 6 FRA for the amount $300,000 assuming (a) the settlement occurs on the date of loan initiation and (b) if settlement occurs on the date of loan repayment. Use the following data to carry out the calculations. Interest rates are expressed as stated
7. Consider the following instruments and the corresponding quotes.a. Rank these instruments in increasing order of their yields.Instrument Quote 30-day US T-bill 5.5 30-day UK T-bill 5.4 30-day ECP 5.2 30-day interbank deposit USD 5.5 30-day US CP 5.6b. You purchase an ECP (Euro) with the
6. You are given the following information:3-m LIBOR 3.2% 92 days 3 3 6 FRA 3.3%3.4% 90 days 6 3 9 FRA 3.6%3.7% 90 days 9 3 12 FRA 3.8%3.9% 90 daysa. Show how to construct a synthetic 9-month loan with fixed rate beginning with a 3-month loan. Plot the cash flow diagram.b. What is the fixed
5. Suppose practitioners learn that the ICE Benchmark Administration (IBA) will change the panel of banks used to calculate the yen LIBOR. One or more of the “weaker” banks will be replaced by “stronger” banks at a future date. IBA replaced the British Banker’s Association(BBA) in 1
4. A corporation will receive USD7 million in 3 months’ time for a period of 3 months. The current 3-month interest rate quotes are 5.675.61. The Eurodollar futures price is 94.90.Suppose in 3 months the interest rate becomes 5.25% for 3-month Eurodeposits and the Eurodollar futures price is
3. The treasurer of a small bank has borrowed funds for 3 months at an interest rate of 6.73%and has lent funds for 6 months at 7.87%. The total amount is USD38 million.To cover his exposure created by the mismatch of maturities, the dealer needs to borrow another USD38 million for months, in 3
2. You have purchased 1 Eurodollar contract at a price of Q0 5 94.13, with an initial margin of 5%. You keep the contract for 5 days and then sell it by taking the opposite position. In the meantime, you observe the following settlement prices:fQ1 5 94:23; Q2 5 94:03; Q3 5 93:93; Q4 5 93:43; Q5 5
1. You have a 4-year coupon bond that pays semiannual interest. The coupon rate is 8% and the par value is 100.a. Can you construct a synthetic equivalent of this bond? Be explicit and show your cash flows.b. Price this coupon bond assuming the following term structure (represented by bid/ask
6. Read the market example below and answer the following questions that relate to it.Proprietary dealers are betting that Euribor, the proposed continental European-based euro money market rate, will fix above the Euro BBA LIBOR alternative... The arbitrage itself is relatively straightforward.
5. Suppose the following stock prices for GE and Honeywell were observed before any talk of merger between the two institutions:Honeywell (HON) 27.80 General Electric (GE) 53.98
4. What does open interest refer to?
3. What are the differences between centrally and bilaterally cleared derivatives?
2. How do collateral requirements differ between futures and OTC derivative markets.
1. What is the difference between initial and variation margin?
5. Show, using an “appropriate” formula, that the negative interest rates can be more than compensated by the extra points on the forward rates. (Use the decompositions given in the text.)
4. What do the Western banks gain if they do that?
3. What are nostro accounts? Why are they needed? Why are the Western banks not willing to hold the yens in their nostro accounts?
2. How does this behavior of Japanese banks affect the balance sheet of the Western counterparties?
1. Show how Japanese banks were able to create the dollar-denominated loans synthetically using cash flow diagrams.
4. How can a synthetic foreign currency loan be engineered?
3. Which two instruments can be used to create the payoffs of an equity swap?
2. What are Eurodollars?
1. Which two instruments can be used to replicate the payoffs of an IRS?
Using your analysis list reasons for and against loaning Taser International, Inc. additional funds.
Using your analysis list reasons for and against investment in Taser International, Inc.'s common stock.
Analyze the firm's financial statements and supplementary information on pages 242-248. Your analysis should include the prepara- tion of common-size financial1. Analyze the firm's financial statements and supplementary information on pages 242-248. Your analysis should include the prepara- tion of
What is your opinion of the invest- ment potential and the creditworthi- ness of Action Performance Companies, Inc.?
Identify the strengths and weaknesses of the company.
Analyze the firm's financial statements and supplementary information. Your analysis should include the preparation of common-size financial statements, key financial ratios, and an evaluation of short-term liquidity, operating effi- ciency, capital structure and long-term solvency, profitability,
Discuss the quality of the disclosures for guarantees and commitments. Could these disclosures be improved?
Read the notes related to guarantees and commitments for Nortel Networks Corporation and discuss what is learned by reading these notes. Make connections to the ways this informa- tion impacts Nortel's capital structure.
Assess the capital structure of Nortel Networks Corporation.
Explain what information you gain from the statement of cash flows that cannot be found directly from the balance sheet or income statement.
Using the Consolidated Statements of Cash Flows, prepare a summary analysis for the years ended July 3, 2004, June 28, 2003, and June 29, 2002. Analyze the cash flows for Candela Corporation, Inc. for all three years.
What information from the balance sheet would be useful to a creditor in determining whether to loan PetMed Express, Inc. money?
Evaluate the creditworthiness of PetMed Express, Inc. based on only the cash flow statements.
Using the Consolidated Statements of Cash Flows on page 145, prepare a summary analysis for the years ended March 31, 2004, 2003, and 2002. Analyze the cash flows for PetMed Express, Inc. for all three years.
Your written interpretation of the income statement and the numbers calculated should offer explanations for why trends have occurred.
Using the Consolidated Statements of Operations and the excerpts from the notes and management discussion and analysis, analyze the profitability of Applied Materials. Your analysis should include the following calcula- tions for all three years: (a) Common-size income statements (b) Growth rates
Analyze the profitability of Dillard's Inc. using the common-size income statements you prepared, as well as any other calculations you deem necessary. Be sure to include an explanation of the effective tax rate and any nonrecurring or nonoper- ating items.
Redo the income statements for Dillard's Inc. and prepare common- size income statements for all three years presented.
The Dillard's Inc. income statements should be reformatted before begin- ning an analysis. Explain what format Dillard's has used and why the income statements should be redone.
Explain what has caused the change. in the retained earnings account from January 3, 2004 to January 1, 2005.
Does 1-800 Contacts have commit- ments and contingencies? If so, what is the significance of these items?
Discuss any significant changes in the asset, liability, and equity structure of 1-800 Contacts.
Which two current liabilities are the most significant? Which two noncurrent liabilities are the most significant? Are the relative proportions of current and non- current liabilities what you would expect for a contact lens distributor? Explain.
Which noncurrent asset categories are the most significant? Are the relative proportions of current and noncur- rent assets what you would expect for a contact lens distributor? Explain.
Based on the inventory valuation method used, would you expect 1-800 Contacts to have tax savings or pay more in taxes? Explain your answer. (You do not need to do any calculations.)
What types of inventories does 1-800 Contacts carry? Why? What inventory method is used to account for the inventories? Does this method reflect current cost at year-end?
To the extent possible analyze the allowance for doubtful accounts relative to accounts receivable and net sales.
Which current asset is the most significant?
Using the Consolidated Balance Sheets for 1-800 Contacts, Inc. for the years ended January 3, 2004 and January 1, 2005, prepare a common- size balance sheet.
What additional financial and non- financial information would investors and creditors need to make investing and lending decisions for Lucent Technologies?
What concerns would investors and creditors have based on only this information?
Evaluate the asset, debt, and equity structure of Lucent Technologies, as well as trends and changes found on the common-size balance sheet.
Using the Consolidated Balance Sheets for Lucent Technologies for September 30, 2004 and 2003, prepare a common-size balance sheet.
Based on this section only, what is your assessment of the prospects for this company?
Evaluate the overall quality of the information presented by Ultimate Electronics, Inc. in the MD&A.
Using the excerpts from the MD&A of Ultimate Electronics, Inc. 2004 annual report, discuss whether each of the items that should be discussed in an MD&A are, in fact, presented in this section. Give examples to support your answer.
Why is the MD&A section of the annual report useful to the financial analyst? What types of information can be found in this section?
Do you believe the compensation of Michael Eisner is appropriate? Why or why not?
Present arguments both for and against the pay increases Michael Eisner received.
Using the information from the "Comparison of Cumulative Total Returns" calculate the rate of return an individual shareholder would have earned for 2002, 2003, and 2004- assuming the shareholder held Walt Disney stock throughout these three years. Also calculate the average return the shareholder
What are the possible reasons for the pay rate that the CEO receives?
What was the percentage pay increase Eisner received in 2002, 2003, and 2004?
The CEO of a company usually works more than the normal 40 hour work week (or 2080 hours per year). Assuming Michael Eisner averages 4000 working hours per year, what is his hourly salary in each of the four years from 2001 to 2004 based on your answer to part 17
Estimate the total compensation of Michael Eisner, Chief Executive Officer (CEO), for 2001, 2002, 2003, and 2004. Explain your rationale in determining this amount.

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