Textbook Problems -- Please find attached

Week 4 Textbook Problems

Week 4 Textbook Problems

Ch. 10

#17. Role of IMF’s

International mutual funds (IMFs) have given investors access to foreign securities because the firm who sponsors IMF makes all their portfolio decisions and completes their transactions. Small investors can also invest in foreign securities by purchasing shares of IMFs, but international capital markets have become more integrated.

#18. Spinning and Laddering

Spinning is where an investment bank converts its shares from an IPO to corporate executives who may be considering an IPO that requires the help of an investment bank. Laddering is when investors place bids above the offer price on shares the first day they come out.

Laddering moves the value of shares up which may not accurately reflect the value of the stock. The owners of the firm may be affected because the will not receive as much profits from the IPO because the spinning and laddering. Spinning can result in shares being sold a lower price, but laddering will only occur if there is a strong demand for the shares.

#21. IPO Dilemma

The disadvantage of using an offer price of $12 instead of $14 is that they are giving up $2 per share, which means they will receive $8 million less. The advantage of this is that Denton can have a successful offering, which can result in them selling of their shares, which could lead to a secondary offering in the future if needed to raise more for new projects. Denton knows that the securities firm needs to set a low price so that they can attract a lot of investors to sell all the shares.

Dividend Yield Problem

Dividend yield = 4 x $0.10 =1.01%

$39.78

Ch. 12.

#1. Orders

A limit order is an order to execute a transaction when the price reaches a specific level, and a market order is an order to execute a transaction at market price.

#2. Margins

Margins specify a proportion of funds to be invested with money that was borrowed versus being paid in cash. Borrowing increases the return earned from the investment in stock, but it also increases the risk because the potential loss goes up, which can happen form investing in stock. Maintenance margin is the minimum amount of margin that must be maintained over the time the investor holds the investment.

#13 Bid-Ask Spread of Penny Stock

Penny stocks are very risky and the order cost for those kind of stocks are often higher because they do not trade on an organized exchange or on NASDAQ. Penny stocks also have zero or very few market makers and competition, and their stocks are usually illiquid, so they are hard to sell.

Ch. 13

#1. Future Contracts

A future contract is a standardized agreement to receive or deliver a specific amount of a financial instrument at a specified date and price. The clearinghouse records all transactions on future contracts, which gives a need for a purchaser of a future contract to check the creditworthiness of the contract seller.

#10. Long versus Short Hedge

A short hedge is a sale of financial futures and it used when liabilities are more rate-sensitive than assets, and a long hedge is a purchase of financial futures and is used when assets are more rate-sensitive than liabilities.

#18. Hedging with futures

The yield curve reflects a decline in interest rates because Elon’s assets are more rate sensitive than its liabilities and it should consider hedging with financial futures. Elon would also buy financial futures to hedge because it will be affected by declining interest rates.

Ch. 14

#1. Writing Call Options

Assumed Stock Price at the Time Net Profit of Loss per Share to Be Earned

The call Option Is About to Expire by the Writer (Seller) of the Call Option

$37 $5

$39 $4

$41 $2

$43 $0

$45 -$2

$48 -$5

#5. Covered Call Strategy

A.

Profit or Loss per Share Profit or Loss per Share

Possible Price of Stock E If a Covered Call Strategy If a Covered Call Strategy

In 6 Months Is Used Is Not Used

$47 $-1 $-3

$50 $2 $0

$52 $4 $2

$55 $5 $5

$57 $5 $7

$60 $5 $10

B.

There is a fifty percent chance that covered call writing will make and extra $2 per share, and there is a 16.7 percent change that the two possible strategies will generate the same gain. There is also a 33.3 percent chance that covered call writing will have a lower gain.

References

Madura, J. (2015). Financial Markets and Institutions. (11 ed.). Cengage