Question

In: Finance

True or False: This question has 5 parts: a) the slope coefficient computed by regressing a...

True or False:

This question has 5 parts:

a) the slope coefficient computed by regressing a particular stock's historical returns on the s&p 500 returns is called beta,the stock's beta with respect to the s&p 500 index; beta is important in finding variance-minimizing hedged portfolis.

b)a swap provides a means for replacing a stream of uncertain and variable payments with a fixed, non-variable payment stream that is certain.

c)the zero-cost collar options trading strategy involves buying a call option and selling a put option on the same stock with the same expiration date, same premium, and a higher strike price than the call option.

d)suppose you go long 10 Eurodollar futures contracts at price of 97. when the futures contracts settle at expiration, 3-month LIBOR is 1%.j ignoring commissions and margin interest, your position results in a $50,000 loss.

e)the current u.s. dollar/Chinese yuan currency spot rate is $0.13 per yuan. the fair value price for the U.S. dollar /Chinese yuan exchange rete for a 2-year forward contract is $0.1408. If the U.S. dollar denominated annual interest rate is 6%, the Chinese yuan-denominated annual interest rate must be 3%.

u can just answer true or false, but if u can simply explain why, It will be better. thank you

Solutions

Expert Solution

a. TRUE - if we consider the returns for stock vs. S&P 500 index, then the slope coefficient in a regression line is called the stock’s beta, as it measures the relative amount of systematic or undiversifiable risk in stocks returns. Its used in the formula of Optimal Hedge Ratio

b. True- a swap provides a means for replacing a stream of uncertain and variable payments with a fixed, non-variable payment stream that is certain or vice versa or some other lesser rate.

c. False - Hold a long position in stock while simultaneously selling an “out-of-the-money” call option to pay for an “out-of-the-money” put option.

d.False - 100-97 =3% was initial LIBOR rate.It dropped to 1% which is 200bps from 3%. In Euro dollar, this means that the value of contract rose and net profit to the long party is 10(#contracts)x200(change in Bps)x$25 (25$ for 1bps is the norm) = +$50000

e. False. Fo=So x e ^(r-rf)T. So, F=.1408,S=.13,r=6%, T=2 so, rf =2%


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