StudentShare solutions

# Modern finance - Assignment Example

## Extract of sample Modern finance

The formula is structured this way in order to make its analysis easier and more standardized. c. The investor in this case, by applying the model, understands the non feasibility of exercising the call option, since the price of the asset is lower than the strike price of 110. Question 2 a. Re = Ra + D/E(Ra-Rd) Firm A: 14% + 0.4(14%-9%) = 0.16 or 16% Firm B: 14% + 0.5(14%-9%) = 0.165 or 16.5% The return to equity represents the return required by shareholders. In this scenario, with all other factors constant, as the Debt to Equity ratios only differ, the results show that for Firm B, the shareholders require a 0.5% higher return than Firm A shareholders, due to the higher leverage. b. given the data, we also know that Risk = variance = w^2(a)*sigma(a)^2 + w(b)^2*sigma(b)^2 + 2w(a)w(b)*p*sigma(a)*sigma(b) i. 0.52*0.052 + 0.52*0.062 + (2*0.5*0.5*1*0.05*0.06) = 0.00303 Std dev = 5.5% ii. 0.52*0.052 + 0.52*0.062 + (2*0.5*0.5*-1*0.05*0.06) = 0.00003 Std dev = 0.5% iii. 0.52*0.052 + 0.52*0.062 + (2*0.5*0.5*0.5*0.05*0.06) = 0.00228 Std dev = 4.77% c. ...
Risk averse investors will usually never invest in risky assets and will play it safe. This means they will remain on or close to the Y axis of the graph below, taking on minimal or no risk and earning a low return. Investors with higher risk preferences will balance their portfolios with risky and risk free assets to achieve an optimal balanced portfolio which offers a return in line with risks. Their goal will be to reach the efficient frontier as shown below in the graph. Adding a risk free asset to a risk averse investors portfolio will not affect his return much. However, doing the same with a risk taking investor may reduce the return earned by the portfolio. As money used in the risk free asset could otherwise be utilized in higher risky assets to obtain a higher return. References Botkin, S. C. (2007). Lower your taxes-big time! : wealth-building, tax reduction secrets from an IRS insider. New York, McGraw-Hill. Chriss, N. (1997). Black-Scholes and beyond option pricing models. New York, McGraw-Hill. http://search.ebscohost.com/login.aspx?direct=true&scope=site&db=nlebk&db=nlabk&AN=51958. JA?GER, C., & BO?Ckhaus, C. F. (2011). The Black & Scholes formula and resulting advancements derivation and interpretation with special focus on the validity of the underlying assumptions. Aachen, Shaker. Siegel, J. G., Shim, J. K., Hartman, S., & Siegel, J. G. (1998). Schaum's quick guide to business formulas 201 decision-making tools for business, finance, and accounting students. New York, N.Y., McGraw-Hill. ...Show more

## Summary

Question 1 a. According to the model, we have: d2= so we have d1= {[ln(70/110)] + [(0.11 + (0.16/2)*(0.5)]} / {0.4*(sqrt(0.5)} = = [(-0.452) + (0.095)] / {0.283} = -1.261 d2= -1.5438 N(d1)= 0.885 N(d2)= 0.932 Value of Call option = N(d1)*S – N(d2)*K*(e^-rT) = 0.885*70 - 0.932*110*0.947 = = -35.14 b…
Author : eturcotte
Save Your Time for More Important Things
Let us write or edit the assignment on your topic
"Modern finance assignment"
with a personal 20% discount.
Grab the best paper

### Check these samples - they also fit your topic

Modern Philosophy Final Assignment
Explain. Having established his own existence as a thinking thing, whose nature is to have thoughts, and having proved that God exists, and that he is no deceiver, Descartes replaces doubt with certainty. By the sixth meditation, he is only left with one more inquiry, I quote: “There now only remains the inquiry as to whether material things exist.
9 pages (2250 words) Assignment
Most banks have cut down their lending rates by up to 25%, with some going as high as 30% against their former lending portfolios. For many banks, the prospect of dishonored loans has resulted in stringent tactics that are aimed at curbing this crisis and improving their lending services to the few who meet their requirements.
8 pages (2000 words) Assignment
Finance Assignment
These are interest rates, inflation rates, balance of payments deficit/surplus, exchange rate and growth rate. The demand and supply of money in the economy is controlled
6 pages (1500 words) Assignment
Finance assignment 2
The major expenditure for any household is on food, rent, travelling, entertainment, and education. Below is a simple household budget. From the budget, it can be seen that essential commodities constitutes a substantial proportion of the expenditure. The amount of
2 pages (500 words) Assignment
Finance Assignment
January effect is related to calendar market anomaly in the financial market in which the prices of the financial security rises during the month of the January.
1 pages (250 words) Assignment
Finance assignment
ealth care." The lieutenant governor-elect, now says the team would retain many of the complex laws new programs and pursue the same goal -- health care for all. Key business leaders are now urging Weld to delay rather than kill the most bitterly opposed feature of the law, the
2 pages (500 words) Assignment
Finance assignment
from the calculated yearly dividends, the first three companies show a gradual increase in the values while Crown resorts indicate a sharp decline before it stabilizes at a value below the dividend
10 pages (2500 words) Assignment
Corporate Finance - Assignment 03
The reason is exchange rates tend to fluctuate from time to time thereby changing the price of goods and services purchased from an international market. On that note, one of the must-do obligations in this assignment is to study the exchange rate
6 pages (1500 words) Assignment
Finance assignment
The company assigns people, capital and ideas to help the clients, the shareholders and the communities they serve. It works as an Adviser: that advise the individuals and companies to
5 pages (1250 words) Assignment
Investment Finance-II Assignment
The correlation and covariance of stock returns of AMP and QBE helped to determine the amount that the investor can expect by investing in these assets. The changes in value of one asset are compared to another. The correlation between AMP and QBE is less than 1 which signifies that changes in value of one will not affect the other stock. In other words, if the stocks of AMP are low, then its effects will be nullified by increase in stocks of QBE.
11 pages (2750 words) Assignment
Hire a pro to write