Question

1.) You are living in the United States and are thinking of traveling to Germany 6 months from now. You can purchase an option to buy euros now at a fixed rate of $1.50 per euro 6 months from now. How is the option like an insurance policy?

3.) You buy stock worth $50. In one year, it pays a dividend of $5 and is worth $60 right after the dividend is paid. What are the dividend income component, price change component and the total return on the stock after one year?

4.) In your own words, what does it mean that common stockholders have a residual claim on the assets of the corporation?

Answer 1

1)	An insurance policy compensates or saves y0u from loss.A call option gives the right to purchase the underlying security at the strike price at expiration date.Here the Underlying security is Euro & expiration date is 6 months..The fixed rate $1.5 is the strike price.If we purchase a call option ,we will be able to purchse the Euro @ $1.5 in 6 months time no matter what the actual prices are after 6 months.Henec even if Euro is above $1.5 ,we willbe able to purchase euro @ 1.5.Hence the option acts like an insurance policy.
2)	Dividend income			=	$5
	Price change component			=	Ending price-Purchase price
				=	$60-$50
				=	10
	Total return			=	Dividend income+price change component
				=	$5+$10
				=	$15
	Return in % terms			=	(Income/purchase price)*100
	Dividend income			=	($5/$50)*100 =$10%
	Price change component			=	($10/$50)*100 =20%
	Total return			=	($15/$50)*100 =30%
3)	A common stockholders has residual claim means that it has claim on whatever that is left after paying all the expenses and liabilities of the company.In case of earning they has a claim whatever is left after the payment of allthe expenses and in the event of liquidation they have claim on whatever is left after paying all the liabilities.
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