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Problem 1 In the table below, you see the data on four Wal-Mart call options, recorded on 4/13/20. All options expire May 1, 2020. The price of Wal-Mart stock was $125, and all Black-Scholes prices were calculated under the assumption of 30% volatility. Please fill out the last column. Just put the word "HIGHER" or "LOWER" for each option. Please answer qualitatively. No calculations are required to answer this question. Option Strike Price Is the observed option premium higher or Black-Scholes Implied lower than the Black- Price Volatility Scholes price? 1 115 10.85 38% 2 120 6.81 31.5% 3 125 3.73 29.7% 4 130 1.76 27.3%Which of the following is generally TRUE about a firm's cost ( a) It is equal to the yield to maturity on the firm's bonds. b) It is greater than the cost of equity. c) It normally cannot be observed, directly or indirectly, in the marketplace. d) It is equal to the coupon rate on the firm's bonds. According to the Capital Asset Pricing Model (CAPM), a stock with an actual return lies above the security market line (SML) a) has more systematic risk than the overall market b) has more risk than warranted based on the realized rate of return c) has less systematic risk than the overall market d) has yielded a higher return than expected for the level of systematic risk assumed The proposition that the value of the firm is independent of its capital structure is c a) The Capital Asset Pricing Model b) Modigliani and Miller (M&M) Proposition I without taxes and without bankr costs c) Modigliani and Miller (M&M) Proposition II without taxes and without bank costs d) The Efficient Markets Hypothesis Which of the following correctly completes the following: M&M Proposition corporate taxes and without bankruptcy costs shows a) the value of an unlevered firm exceeds the value of a levered firm by the value of the interest tax shield b) a levered firm can increase its value by reducing debt c) there is a linear relationship between the amount of debt in a levered firm value d) the value of a levered firm is equal to its aftertax earnings before interest an (EBIT) discounted by the unlevered cost of capital According to Modigliani and Miller (M&M) Proposition II without corporate ta factors? without bankruptcy costs, a firm's cost of equity is a function of which of the fo I. The unlevered cost of capital II. The firm's debt to equity ratio III. The firm's cost of debt II only b) I and II only c) I and III only d) I, II and IIIA nancial institution has the following portfolio of over-the-oounter options on sterling: T a Delta of Gamma of Vega of yp Option Option Option Call 1.8 Call 0.2 Put 0.? Call 1.4 A traded option is available with a delta of 0.6, a gamma of 1.5, and a vega of 0.8. 1. What position in the traded option and in sterling would make the portfolio both gamma neutral and delta neutral? (4 marks) 2. What position in the traded option and in sterling would make the portfolio both vega neutral and delta neutral? (4 marks) 3. is it possible to nd a position in the traded option and in sterling that make the portfolio gamma neutral, vega neutral and delta neutral? Explain. (2 marks)