TRUE OR FALSE 1. Buying a derivative on an exchange, through a clearing house, eliminates all...

TRUE OR FALSE

1. Buying a derivative on an exchange, through a clearing house, eliminates all of the risk of owning that derivative.

2. You have an investment fund with $100,000,000 and would like to take a controlling interest in one or more publicly traded companies. The best way to figure out what companies you can afford to buy is by sorting them according to their stock price. It will be cheaper for you to take a controlling interest in companies with a lower stock price.

Solutions

Expert Solution

1. FALSE. Clearing houses are kept as centralised institutions which deal with the buying and selling centrally so that all long and short positions are covered. However, these houses just reduce the risk and do not eliminate it completely. As these operate as monopoly of a duopoly, the losses which are too big for these houses to absorb are absorbed by the members most of which are banks. So if out of 100 participating members, 1 defaults, the rest 99 absorb those risks. So the risk is reduced but not completely eliminated. If the house actually falter, they become a new source of risk which they were specifically meant to eliminate.

2. FALSE. Lower stock price does not necessarily mean that it easier to take controlling interest in companies. It depends on the market capital which is a product of the stock price and the number of shares in the market.

For example if there is a company with 1 billion shares and cost of each share is $20, then with $100,000,000 it will be possible to buy 5 million shares and that is 0.5% of the company.

However if there is another company with 1 hundred thousand shares each priced at $1000, then with 100,000,000 it will be possible to buy all 1 hundred thousand shares. So in spite of having a higher stock price, the second company can be aquired but not the first. So market cap is the determinant which can help us identify whether 100,000,000 will be enough to get a controlling stake in the company or not.

If you found this helpful, please rate it so that I can have higher earnings at no extra cost to you. This will motivate me to write more.

Rahul Sunny answered 2 months ago

Next > < Previous

Related Solutions

Chapter 1 through 10 TRUE/FALSE Write T for true or F for false. Communication across all...

Chapter 1 through 10 TRUE/FALSE Write T for true or F for false. Communication across all sectors of the health arena is critical to quality care. Communication between provider and consumers affects every facet on the health continuum from health promotion and disease prevention to assessment, diagnosis, and treatment. Treatment adherence leads to better health out- comes and no adherence places the patient at risk for poor recovery and dis- ease progression. Treatment adherence refers to not only medication adherence...

The derivative of ln|x| is an odd function is it true/false

True or false 11.All Appliances, Inc. installed a built-in dishwasher in Greta's house. The dishwasher is...

True or false 11.All Appliances, Inc. installed a built-in dishwasher in Greta's house. The dishwasher is a fixture. 12.Presentment warranties are made by the drawer of a check or draft. 1 3.Buildings constructed on land are considered personal property. 14.There are three parties on a promissory note: the maker, the drawer and the payee 15.A party cannot obtain ownership of someone else's real estate through adverse possession. 16. Baker makes a will leaving his BMW roadster to his beloved nephew...

A main task of the clearing house of a futures exchange is to set and adjust the level of margin requirements from time to time.

a) A main task of the clearing house of a futures exchange is to set and adjust the level of margin requirements from time to time. What is a major factor that the exchange considers in setting the level of margin for a given contract? Please elaborate.b) Daily marking-to-market is a standard feature in futures trading. Briefly explain the importance of this feature.

1. The medium of exchange function of money eliminates: A. the opportunity cost of holding money....

1. The medium of exchange function of money eliminates: A. the opportunity cost of holding money. B. barter, or the exchange of goods for goods. C. the need for chequing accounts. D. the need for currency. 2. Barter requires the existence of: A. the backing of the government. B. the double coincidence of wants. C. paper currency and coins. D. gold or silver.

6. Two derivative products that may be offered through a stock exchange are an options contract...

6. Two derivative products that may be offered through a stock exchange are an options contract and a futures contract. Briefly explain the main features of each of these products. Why might an investor use these products?

1. All mutations are harmful. a) True b) False 2. Which of the following is TRUE...

1. All mutations are harmful. a) True b) False 2. Which of the following is TRUE about mutations? a) Mutations are more likely to occur if they result in a useful trait b) Mutations can be inherited. c) Mutations only occur during DNA replication d) Mutations do not occur in organisms that reproduce asexually 3. Which of the following would increase the chances of getting a mutation? a) Wearing a hat outside b) Putting sunscreen on your face and arms...

C++ Questions: 1. True/False: an int uses 4 bytes in memory on all systems. 2. True/False:...

C++ Questions: 1. True/False: an int uses 4 bytes in memory on all systems. 2. True/False: a double typically offers better precision than a float. 3. True/False: The following two statements are equivalent assuming isPair is a variable of type bool: if (isPair) if (isPair == true) 4. Provide a value we could put in the blank so that the value of x will be 20 after the code snippet. int x = _____; x *= 4; 5. Provide a...

TRUE OR FALSE 1. If a currency’s spot market is illiquid, its exchange rate may be...

TRUE OR FALSE 1. If a currency’s spot market is illiquid, its exchange rate may be highly sensitive to a single large purchase or sale transaction. ___________ 2. In triangular arbitrage, where three types of currencies if any two of the three exchange rates are known, the exchange rate of the third pair can be determined. __________ 3. Covered interest arbitrage is the process of capitalizing on the interest rate differential between two stock exchanges in the same country. __________...

True and False True/False Write True or False before the statement. 1. Gypsum is the brand...

True and False True/False Write True or False before the statement. 1. Gypsum is the brand name for sheetrock. 2. Coreboards and liner boards come in 2-foot widths. 3. Adhesives are not used for bonding gypsum board directly to supports. 4. Supplemental fasteners should be used with contact adhesives. 5. Gypsum panels are applied first to ceilings and then to the walls. 6. The floating angle method of drywall application omits fasteners in the corner intersection of the ceilings and...

Subjects