# KYC's stock price can go up by 15 percent every year, or down by 10 percent. Both

## Question:

KYC's stock price can go up by 15 percent every year, or down by 10 percent. Both outcomes are equally likely. The risk free rate is 5 percent, and the current stock price of KYC is 100. (a) Price a European Put option on KYC with maturity of 2 years and a strike price of 100. (b) Price an American Put option on KYC with the same characteristics. Is the price different? Why or why not? 26. IBM is currently trading at $90.29 per share. You believe that IBM will have an expected return of 7% with volatility of 26.1% per year, while annual interest rates are at 0.95%. What is the price of an European put on IBM with a strike price of $90 and maturity of 1 year? 27. Shares of Ontel will sell for either $150 or $80 three months later, with probabilities 0.60 and 0.40, respectively. A European call with an exercise price of $100 sells for $25 today, and an identical put sells for $8. Both options mature in three months. What is a price of a three-month zero-coupon bond with a face of $100?

provide answers to all questions here

Define the following terms from market area analysis. (a) market area (b) net price (c) demand density 2. The algebraic formula for market area per firm is M = q OVER de where the terms are defined as in the text. Describe the impact on the market area per firm of the following. (a) an increase in economies of scale (per capita demand constant) (b) a decrease in travel costs (per capita demand constant) (c) an increase in perita demand (output per store constant) (d) an increase in population density (output per store constant) 3. The algebraic formula for market area per firm is M = q OVER de Assume that consumers obey the law of demand. What is the impact on the market area per firm of the following? (a) a decrease in travel cost (b) an increase in economies of scale (c) how does the price elasticity of demand influence the impact of (a) and (b)? 4. What are the principle assumptions of the simple central place model? The central place model describes the location patterns of what type of firm? 5. What are 4 characteristics of the simple central place model? 6. Discuss how each of the following affect the simple central place model. (a) Diversity and scale economies (b) Large means few (c) Shopping paths 7. How

If the actual futures price is below $14.09 you would like to take advantage of this mispricing by buying the futures contract, i.e. entering into the contract to buy Silver in 9 months. This is also sometimes referred to as "taking a long position in the futures contract". You can then use the reverse of the above replication argument to synthesize a short position in the future to offset your long position. Alternatively, if the price is above, you would enter in a short position in the futures contract, i.e. agree to sell Silver in 9-months at a level above $14.09, and use the above replication strategy to replicate a long position in the future. The main idea here is that the cost of the replicating strategy is $14.09. Hence if you can buy the future at lower price or sell at higher, you should do that and use the replication strategy to offset your position. This way you will eliminate all your risk and make risk-free or arbitrage money. The argument works exactly the same way, with signs reversed, in both case. We consider both cases below. For concreteness, let's assume you can sell the contract at $14.30, which is higher that the fair price you calculated in part a. To take advantage of this, you would do the following: i. Enter into a contract to sell Silver in 9 months at $14.30 ii. Borrow $13.50 now and buy an ounce of silver. You will have to borrow this money for 9 months.

Now consider an interest-rate hike in period 1. Specifically, assume that as a result of turmoil in international financial markets, the world interest rate increases from 20 percent to 50 percent in period 1. Find the equilibrium levels of saving, investment, the trade balance, the current account, and the country's net foreign asset position in period 1. Provide intuition.

6. Suppose that the interest rate is 20 percent, and that A₁ increases to 4. Calculate the equilibrium values of consumption, saving, investment, and the current account in period 1. Explain.

7. Suppose that the interest rate is 20 percent, that A₁ = 3, and that A2 increases from 3.2 to 4. Calculate the equilibrium values of con sumption, saving, investment, and the current account in period 1. Explain.

Suppose planned investment is I = 20, government purchases is G = 25 and net exports is NX = 5. Further suppose that autonomous consumption is AC = 25. Answer the following using the Aggregate Expenditure Model.

(a) Calculate the level of autonomous expenditure in the country.

(2 marks)

(b) Suppose the country was in the midst of the COVID-19 pandemic. Low consumer confidence has resulted in households saving a greater proportion of their income, resulting in a marginal propensity to consume (MPC) of 0.5. What is the equilibrium level of real GDP (Y)?

(2 marks)

(c) Next, suppose that the government decided to stimulate the economy by increasing government purchases by AG = 10.

i. Calculate the autonomous expenditure multiplier.

(2 marks)

ii. Using the autonomous expenditure multiplier from part i., calculate the change in equilibrium GDP. Show your workings.

Failure to use the autonomous expenditure multiplier in your calculations will result in 0 marks.

(2 marks)

(d) A vaccine for COVID-19 has just been developed but has yet to be deployed in the country. However, news of the vaccine has boosted consumer confidence, increasing the portion of household income spent on consumption.

How will equilibrium GDP change as a result of this development (i.e. increase or decrease)? Briefly explain your answer with reference to the equation

Y = AX + (MPC x Y),

where AX refers to the level of autonomous expenditure. Assume that the level of autonomous expenditure remains unchanged.

Present value and recursive asset pricing formula

(1) Annuity pricing a) An annuity is a financial instrument that pays out a constant amount of income per period for as long as the annuitant (i.e. annuity purchaser) is alive. Let P be the expected present value of annuity payments. Let a denote annuity income payment per period, m denote the probability of dying by next period (a.k.a mortality rate) and r denote the interest rate. Use the recursive asset pricing formula a + EP' 1+r P=

to show that

P = a r+m

b) Suppose that an elderly annuitant has 500,000 in wealth and uses this wealth to purchase an annuity. Calculate the annual payment that the annuitant should expect if r = 0.05 and m= 0.03 per year. Explain how your answer is related to equilibrium economic profit of a financial institution that issued the annuity.

(ii) Life insurance premium

A life insurance policy is a financial contract that collects a premium of p per period from the insured and pays out a lump sum benefit B upon the death of the insured. Let m denote the mortality rate, r denote the interest rate and V denote the expected present value of economic profits of the insurance company on this policy. Use the recursive asset pricing formula

v= P+ EV' 1+r

to express equilibrium life insurance premium, p, through exogenous variables. Explain your answer and show all work.

(iii) Loan calculators

Suppose that loan of size S is repaid over T periods with equal per-period payments p and interest rate on the loan r. Initial loan size has to be equal to the present value of the payments:

Р S=1+r+ (1+r)² + ++ P (1+r)T

a) Calculate a monthly payment on the following mortgage. Annual interest rate is r = 0.06, mortgage term is 30 years, loan size S = 200,000. (Hint: since you are asked about the monthly payment, present value should be discounted at a monthly frequency. Start with figuring out the monthly interest rate and the mortgage term expressed in months, then apply the formula).

b) Jill would like to buy a car that costs S=20,000. The dealer offers her a 60-month loan with 0 down and a monthly payment p = 421. Calculate the annual interest rate on this loan using Excel. Take the following steps: 1. Generate a column of 40 monthly interest rates, with r = {0.001,0.002,...,0.040), say column A, starting with Al.

2. Use the geometric series formula to express the present value of payments through p, T and Tm, where I'm is the monthly interest rate. Plug in the numeric value for p, 7 and put this formula into cell B1. Have the formula refer to the interest rate from cell A1. Select B1:B100 and press CTRL+D. This will copy the formula and generate a column of present values that correspond to different monthly interest rate. Pick an

interest rate from a row whose cell B value corresponds most closely to S. 3. Convert the monthly interest rate that you found on step 2 into annual using the compounding formula

Discuss the 5 ps of marketing

Discuss the factors affecting interest rates

Suppose there is a small open economy (prices are flexible and perfect capital mobility). The total supply at equilibrium can be described by the following data: Y = f (K, L) 8 K0.3 10.7, K= 100; L=100. Aggregate demand in the commodity market can be described by the following equations: C = 50+ 0.75 Yd, I = 400-2000r, G = 250 T = 200, NX= 150-100€ r=r* = 0.1 The money market can be described by the following equations: L = 0.5 Y - 50 r P = 1 M = 395 =

e) Suppose that a country has a fluctuating (flexible) exchange rate that coincides with the equilibrium exchange rate. The potential gross domestic product in a country is 1000. What policy will the government choose? Why? Graph, explain and calculate how much and how the chosen policies will change? Evaluate the consequences of the chosen measures.

f) Suppose the average price level is 1.05. Write the function of the AD curve (based on the initial condition) and draw the AD curve.

Suppose that an economy has the Phillips curve

π = πT-10.5(u - 5).

a. What is the natural rate of unemployment?

b. Graph the short-run and long-run relation ships between inflation and unemployment.

c. How much cyclical unemployment is necessary to reduce inflation by 4 percentage points? Using Okun's law, compute the sacrifice ratio.

d. Inflation is running at 6 percent. The central bank wants to reduce it to 2 percent. Give two scenarios that will achieve that goal.

Consider the following changes in the economy. On a diagram show how the IS curve reflects each change. Explain how and why GDP is affected in the short run.

(a) The government offers a temporary investment tax credit: for each dollar of investment that firms undertake, they receive a credit that reduces the taxes they pay on corporate income.

(b) A booming economy in Europe this year leads to an unexpected increase in the demand by European consumers for U.S. goods.

(c) U.S. consumers develop an infatuation with all things made in New Zealand and sharply increase their imports from that country.

(d) A housing bubble bursts, so that housing prices fall by 20% and newConsider that you have in your portfolio a 3-year 3% coupon bond with face value of $100. The coupons of this bond are paid semi-annually. We assume that the current yield to maturity on the bond is 4% per annum with continuous compounding.

a. Could you please first describe the two concepts of bond duration and convexity? Then, please compute the duration and the convexity of the bond described above?

b. You expect a steepening of the interest rates yield curve very soon, either through a bull steepening or a bear steepening. Could you please first define these two market phenomena and then propose strategies for taking advantage of such market environments given your existing portfolio?

Billy and Becky Jean It is November 2021, Billy and Becky Jean meet with you to review their family financial situation. They had a friend that recently passed away in their 50's and this has made them start to think about their own estate plan. They have completed a detailed questionnaire and the following summaries have been prepared: Personal Information Client Age Health Occupation Billy Jean 69 Excellent Sales Manager Becky Jean 64 Excellent Engineer Owen Jean (Son) 47 Poor Unemployed Melanie Jean (Daughter) 40 Excellent Marketing Grandchildren 15, 12 & 9 Employment Billy and Becky are happily married and are actively planning their retirement in 6 months. Billy has spent his career in sales and Becky as an engineer at a manufacturing company. When Billy and Becky retire in 6 months, they are planning on spending the winters travelling and their summers at their cottage. Financial Position The couple has a home worth $1,200,000, which is mortgage free. They purchased it in 1995 for $300,000. They also have a cottage in the Kawartha's worth about $350,000, which they bought for $75,000 cash 25 years ago. Both properties are held in joint tenancy. Billy has accumulated $900,000 in RRSP assets and he has not named a beneficiary. Becky has $800,000 in RRSP assets and she has named Billy as her beneficiary. Both Billy and Becky have fully maximized their TFSA contributions, contributing $81,500 total. Billy's TFSA is valued at $95,000 today and Becky's is valued at $100,000. Neither of them has named a beneficiary or a successor annuitant on their TFSA accounts. Becky used to actively trade stocks in a non-registered account. She stopped after the market crash in 2000 and realized $100,000 capital loss that she has been carrying forward since then. Last year, Becky inherited $500,000 from her mother's estate. She was unsure of what to do with this money and decided she wasn't ready to decide because of her grief. She put her inheritance in a non-registered account and invested the money in a money market fund. Children A major concern is their son, Owen. He has been in and out of trouble with the authorities since high school. He has never held a job for any length of time. He has been treated for substance abuse. Owen has been living with his parents and they have been helping him financially. Melanie is very successful in her field and is comfortable financially. She has three children who will almost certainly go to college or university. Billy and Becky have stated that they want to help pay for their grandchildren's post-secondary education but have not started saving for them yet. Life Insurance Billy and Becky have $500,000 joint-life, last-to-die, term-to-100 policy, which they took out 10 years ago. The estate is named at the beneficiary. Becky and Billy want to ensure that the assets they have worked hard for are passed on to their heirs. They want to minimize any taxes owing when they die. Goals & Objectives Billy and Becky realize that the amount of money they have managed to accumulate is more than adequate for their lifetime needs and they want to provide for their children and grandchildren through their estate. They are aware that they will have to support Owen. They can control how much he gets while they are living but they are concerned that Owen would squander any inheritance and ask how they can structure his legacy to meet his needs for life. They would like to set aside funds for their grandchildren's education as tax efficiently as possible. They would also like to leave some funds to their local hospital. Wills & POAs They had drawn up wills and POAs when their kids were small. They destroyed these documents 5 years ago because they were outdated and did not represent their current wishes. They have been meaning to see their lawyer to get new documents drawn up but have been focused on their upcoming retirement and have not gotten them done. 1) Identify Billy and Becky's estate planning objectives. (3 marks) 2)If Billy were to die today, how would his estate be distributed? Assume that Billy and Becky live in Ontario. (4 marks) 3) If Billy were to die today, how would his estate be distributed? Assume that Billy and Becky live in Ontario. (4 marks) 4) Provide the Jean's with four recommendations today to meet their goals and objectives. These recommendations need to based on their current situation (i.e. moving to Alberta is not one). Along with your recommendation explain one benefit and drawback to implementing it.

In an experiment run by researchers recently, subjects were randomly given either a mug or a pen, and were told that they owned the item they were given and could take it home at the end of the experiment.

Then, independently of whether they had a mug or a pen, half of the subjects (Group 1) were told that they would have a 90% probability of being able to exchange their object for the other one at the end of the experiment (with the researcher), and the rest (Group 2) were told that they would have a 10% chance of being able to exchange their object (with the researcher).

Then, subjects filled out a time-consuming survey, the purpose of which was to give subjects time to form an attachment to the item they had.

Finally, subjects were asked whether they want to exchange if given the chance.

a) [5 points] In a neoclassical model (with no reference dependence), approximately what percentage of subjects should want to exchange in Group 1 and Group 2?

(b) [5 points] In a prospect-theory model where the reference point is the status quo, in which group should a larger percentage of subjects want to exchange?

(c) [5 points] In the last step of the experiment, subjects were asked if they wanted to exchange if given the chance.

In Group 1, 56.4% said they would want to exchange, while in Group 2, 22.7% said they would want to do so.

Explain this difference between Group 1 and Group 2 using prospect theory.

What does this tell us about the hypothesis that the reference point is the status quo?

At the start of the movie we meet Ray Kroc (Michael Keaton) who is a struggling traveling salesman for Prince Castle Sales. The year is 1954. The movie is opening with him delivering a sales pitch directly to the camera. What is Kroc selling that nobody wants?

Kroc is selling a milkshake mixer.

2) While traveling around, trying to sell his product, what does Kroc observe about the many fast food/drive-in restaurants that he stops at?

Kroc observes that many fast food establishments take very long to prepare food.

3) When Kroc calls June, who is the secretary of the sales division of the company he works for, Prince Castle Sales, he finds out an order has been placed for six milkshake mixers from a restaurant drive-in out in California. He thinks this is an error so he calls the restaurant which he finds out is McDonald's. He talks to Dick, one of the owners and finds out it was a mistake. How many do they really want?

The current price for a stock index is 1,000. The following premiums exist for various options to buy or sell the stock index six months from now: Strike Price Call Premium Put Premium 950 120.41 51.78 1,000 93.81 74.20 1,050 71.80 101.21 Strategy I is to buy the 1,050-strike call and to sell the 950-strike call. Strategy II is to buy the 1,050-strike put and to sell the 950-strike put. Strategy III is to buy the 950-strike call, sell the 1,000-strike call, sell the 950-strike put, and buy the 1,000-strike put. Assume that the price of the stock index in 6 months will be between 950 and 1,050. Determine which, if any, of the three strategies will have greater payoffs in six months for lower prices of the stock index than for relatively higher prices. (A) None (B) I and II only (C) I and III only (D) II and III only (E) The correct answer is not given by (A), (B), (C), or (D)19. 20. The current price of a stock is 200, and the continuously compounded risk-free interest rate is 4%. A dividend will be paid every quarter for the next 3 years, with the first dividend occurring 3 months from now. The amount of the first dividend is 1.50, but each subsequent dividend will be 1% higher than the one previously paid. Calculate the fair price of a 3-year forward contract on this stock. (A) 200 (B) 205 (C) 210 (D) 215 (E) 220 21. A market maker in stock index forward contracts observes a 6-month forward price of 112 on the index. The index spot price is 110 and the continuously compounded dividend yield on the index is 2%. The continuously compounded risk-free interest rate is 5%. Describe actions the market maker could take to exploit an arbitrage opportunity and calculate the resulting profit (per index unit). (A) Buy observed forward, sell synthetic forward, Profit = 0.34 (B) Buy observed forward, sell synthetic forward, Profit = 0.78 (C) Buy observed forward, sell synthetic forward, Profit = 1.35 (D) Sell observed forward, buy synthetic forward, Profit = 0.78 (E) Sell observed forward, buy synthetic forward, Profit = 0.34

Which of the following is a strategy for linking performance measures to financial outcomes: A. Analyzing click-through rates B. Developing advertising budgets C. Paying for direct-mail pieces D. Maintaining sales receipts 56. What type of software do many businesses require be installed on computer systems as a security feature? A. Reality B. Firewall C. Spider D. Media 57. The FPD Company keeps copies of its brochures, catalogs, and flyers on file for future reference. This is an example of a company that is maintaining __ records. A. inventory B. legal C. promotional D. asset 58. Which of the following is most likely to be a dynamic element of a business's external environment: A. Decrease in personnel B. Increase in competition C. Renewed emphasis on training D. New quality control measures 59. James needs to hire a bookkeeper for his growing business. To determine the new employee's salary, James obtained pay data from five companies in his industry that are similar in size. The research indicated the following: Company A pays $31,205; Company B pays $29,995; Company C pays $34,800; Company D pays $42,500; and Company E pays $36,500. James decided to set his bookkeeper's salary at $35,000. What measure of central tendency did James use to set his new employee's salary? A. Mode B. Mean C. Range D. Median 60. Hill Industries uses specific criteria to evaluate vendor performance, including on-time delivery rate, return rate, and number of customer complaints. These metrics are also known as A. consensus scales. B. performance indicators. C. economic indicators. D. return on capital.

4) The ordering of so many milkshake mixer machines by McDonald's piques Kroc's curiosity and he makes a drive to San Bernardino to see the restaurant in person. What does Kroc find out about this restaurant that is so different than the other fast-food/drive-ins he has been to? What does he observe/experience?

5) Kroc introduced himself to one of the owners—Mac McDonald and tells him he has some operation and that he was the one who sold him the milkshake mixer. Mac tells him he can give him a tour and Kroc happily agrees. Kroc gets a behind-the-scenes look at how McDonald's operates. What are they doing that makes them so much better than their competition?

6) After the initial kitchen tour, Kroc wants to take the McDonalds brothers out to dinner because he says he is impressed with how the restaurant runs and that it is so remarkable. Wanting to hear their story/the history of McDonald's, he takes them out to dinner. Answer the following questions:

a) When the restaurant first opened they were selling multiple items and sales were down. They also realized a drive-in restaurant had a host of problems like attracting teenagers, slow service, etc. They also realized that most of their profits came from hamburgers, fries, and milkshakes. With this realization, what did they decide to do?

b) What was the purpose of the drawings out on the tennis court?

7) Kroc tells the McDonalds brothers he wants to franchise the restaurant. The brothers tell him they already tried and are against it—they already have five restaurants set up—four around California and one in Phoenix, Arizona. They say that is all there will ever be. Why are they against franchising?

8) Kroc makes note of a picture on the wall in the brothers' office. It is of a McDonald's with two golden arches on either side of the building. Who came up with the concept/design?

9) True or False. Circle one. Kroc's wife, Ethel, is skeptical of his idea to franchise McDonalds.

10) Fill in the blank. Kroc insists that the brothers let him start franchising/lead their franchising efforts and says that he will start by opening one in his town- Des Plaines, Illinois so that he can monitor it. They finally agree and he signs a _____. It allows the brothers control of every decision made since the franchise stores will be representing them. All changes need to receive the brothers' approval in writing.

11) Kroc goes from bank to bank to try to get a loan to start his franchise but they all remember him from his other pitches over the years and won't give him a loan. Finally, a banker is open to loaning him start-up funds but tells him he has to put up what for leverage/collateral?

12) As construction begins at Kroc's first franchise in Des Plaines, Illinois (where he lives), Kroc tries to make some changes but contractually he can't unless the brothers will a...

1. Explain, what it means to say that a change is an economic improvement - i.e. leads to increased efficiency.

2. Give an example of a situation where applying the Pigouvian solution to an externality problem makes the outcome less efficient than doing nothing. Your example must be a numerical example where taxing is the inefficient or not the least-cost avoider solution.

3. Explain, Coase's critique of Pigou. [Note: Coase has two criticisms of Pigou's approach to negative externalities such as pollution].

address all questions home sales drop

sharply.

Consider a two-period economy populated with consumers that have the same income and the same preferences. There is also a government whose objective is to spend 60 in period 0 and 150 in period 1. This government can issue bonds in period 0. Each bond pays interest rate r. Consumers can also issue bonds at the same interest rate. Consumers' optimal decisions, given r, imply that aggregate consumption C is equal to (Yo-To)+(Y₁-T₁)/(1+r). Suppose that Y₁ = 300 and that income is expected to remain at this level in period 1.

a) Define the competitive equilibrium of this economy.

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