IFM(P.E.P)

pep-ifm.doc

For each question and sub question include two references (academic journals)

4. Answer both parts.

(a) Describe the characteristics of ‘factor models’ of asset pricing and explain the main features of one model of this type.

· Write an overview for the four factor models (factor analysis, macroeconomic variables, firm characteristics, and fama & French)

· And then Write in details about the fama & frech model

· Minimum 600 word

(b) Critically analyse the implications of stock market ‘anomalies’ for the validity of the efficient markets hypothesis.

Speculative bubbles

Seasonality

Over reaction to news

Firm charactertics

Short term momentum

International diversification

Minimum 600 words

5. Answer all parts.

Using examples, explain the relevance of arbitrage (or ‘no arbitrage’) in the following contexts:

(a) The Arbitrage Pricing Theory (APT);

(b) The pricing of currency forwards;

300 hundred words each

6. Answer all parts.

(a) Explain the payoff profiles for the following four option positions:

(i) buying calls; (ii) writing calls; (iii) buying puts; (iv) writing puts.

Minimum 500 words

(c) Use an example to compare the relative merits of using options and forward contracts for hedging foreign exchange risk.

Minimum 500 words

300 word