Homework Question

1. How have international mutual funds (IMFs) increased the international integration of capital markets among countries?

2. Describe spinning and laddering in the IPO market. How do you think these actions influence the price of a newly issued stock? Who is adversely affected as a result of these actions?

3. Denton Company plans to engage in an IPO and will issue 4 million shares of stock. It is hoping to sell the shares for an offer price of $14. It hires a securities firm, which suggests that the offer price for the stock should be $12 per share to ensure that all the shares can easily be sold. Explain the dilemma for Denton Company. What is the advantage of following the securities firm’s advice? What is the disadvantage? Is the securities firm’s incentive to place the shares aligned with that of Denton Company?

4.Over the last year, Calzone Corporation paid a quarterly dividend of $0.10 in each of the four quarters. The current stock price of Calzone Corporation is $39.78. What is the dividend yield for Calzone stock?

5. Explain the difference between a market order and a limit order.

6. Explain how margin requirements can affect the potential return and risk from investing in a stock. What is the maintenance margin?

7. Explain how foreign stock exchanges have reduced transaction costs.

8. Describe the general characteristics of a futures contract. How does a clearinghouse facilitate the trading of financial futures contracts?

9. Explain the difference between a long hedge and a short hedge used by financial institutions. When is a long hedge more appropriate than a short hedge?

10. Hedging with Futures Elon Savings and Loan Association has a large number of 30-year mortgages with floating interest rates that adjust on an annual basis, and obtains most of its funds by issuing five-year certificates of deposit. It uses the yield curve to assess the market’s anticipation of future interest rates. Elon believes that expectations of future interest rates are the major force affecting the yield curve. Assume that a downward-sloping yield curve with a steep slope exists. Based on this information, should Elon consider using financial futures as a hedging technique? Explain.

11. A call option on Illinois stock specifies an exercise price of $38. Today, the stock's price is $40. The premium on the call option is $5. Assume the option will not be exercised until maturity, if at all. Complete the following table.

ASSUMED STOCK PRICE AT THE TIME THE CALL OPTION IS ABOUT TO EXPIRE	NET PROFIT OR LOSS PER SHARE TO BE EARNED BY THE WRITER (SELLER) OF THE CALL OPTION
$37
39
41
43
45
48

12. Evanston Insurance, Inc., has purchased shares of Stock E at $50 per share. It will sell the stock in six months. It considers using a strategy of covered call writing to partially hedge its position in this stock. The exercise price is $53, the expiration date is six months, and the premium on the call option is $2. Complete the following table.

POSSIBLE PRICE OF STOCK E IN SIX MONTHS	PROFIT OR LOSS PER SHARE IF A COVERED CALL STRATEGY IS USED	PROFIT OR LOSS PER SHARE IF A COVERED CALL STRATEGY IS NOT USED
$47
50
52
55
57
60

b.  Assume that each of the six stock prices in the table's first column has an equal probability of occurring. Compare the probability distribution of the profits (or losses) per share when using covered call writing versus not using it. Would you recommend covered call writing in this situation? Explain.