11. You are working on the arbitrage desk at a hedge fund and you observe the...

11. You are working on the arbitrage desk at a hedge fund and you observe the following data on your screen: S = $60 K = 60 CE = $5.00 PE = $5.00 D = 0 T = 3 months r = 3% (continuously compounded) Do you see an opportunity? How would you exploit it? How much would you make on this trade?

Expert Solution

Do you see an opportunity?

Yes, calculated value of Call option is $ 5.448317 (See the image pasted below) and given value in question is $ 5. Given value of call option is cheaper than calculated value hence opportunity does exists.

How would you exploit it?

We can buy call option at $ 5 and clear that call postion at $ 5.448317 (when market value goes up for call). The call option value of market will surely appreciate soon.

How much would you make on this trade?

Calculate value of call option - Given or Market price of call option = Profit

We can earn $ 5.448317 - $ 5 = $ 0.448317 (Profit on per call contract)

----------

Working for call option is below:

jeff jeffy answered 1 year ago

Plaese show all work, thank you You are working on a currency arbitrage desk. You look...

Plaese show all work, thank you You are working on a currency arbitrage desk. You look up exchange rates and interest rates for the USD versus the Canadian Dollar (CAD) and find the following: The current spot rate is 0.810 USD/CAD. The 12-month forward exchange rate is 0.833 USD/CAD (note: Canadian dollar futures contracts are 100,000 CAD each). The 12-month T-bill yield in the USA is 1.31% (assume this is the continuously compounded annualized yield) and the 12-month risk-free rate...

8. A hedge fund charges 2% plus 20%. A pension fund invests in the hedge fund....

8. A hedge fund charges 2% plus 20%. A pension fund invests in the hedge fund. Plot the return to the pension fund as a function of the return to the hedge fund. The incentive fee of 20% is charged on the return after subtracting the annual 2%. No incentive fee is charged if the return after subtracting the annual 2% fee is negative. [hint: Probably best if you do this in Excel, however, you could also use grid paper...

Assume that you are the portfolio manager of the SF Fund, a $3 million hedge fund...

Assume that you are the portfolio manager of the SF Fund, a $3 million hedge fund that contains the following stocks. The required rate of return on the market is 11.00% and the risk-free rate is 5.00%. Stock Amount Beta A $1,075,000 1.20 B 675,000 0.50 C 750,000 1.40 D 500,000 0.75 $3,000,000 Based on the CAPM wat rate of return should investors require on this fund?

Evaluate which fund structure (alternative mutual fund or hedge fund) you would choose for FIM. Your...

Evaluate which fund structure (alternative mutual fund or hedge fund) you would choose for FIM. Your answer should briefly describe the advantages and disadvantages of each structure.

explain the no arbitrage argument for option pricing, in particular the concept of riskless hedge

You run a hedge fund with a line of credit that allows you to borrow $100...

You run a hedge fund with a line of credit that allows you to borrow $100 million at an annual interest rate of 5%. The minimum amount of time that you can borrow for is one day. There are 365 days in a year. The spot rate for a euro is $1.20. The spot rate for a yen is $0.0094. The spot rate between yen and euros is ¥125/€. Which currencies should you buy or sell to take advantage of...

What is a hedge fund and how is it different from a mutual fund?

Explain the differences between a mutual fund, an exchange trade fund (ETF), and a hedge fund.

1. Assume that you are the portfolio manager of the SF Fund, a $3 million hedge...

1. Assume that you are the portfolio manager of the SF Fund, a $3 million hedge fund that contains the following stocks. The required rate of return on the market is 12.00% and the risk-free rate is 4.00%. What rate of return should investors expect (and require) on this fund? Stock Amount Beta A $1,075,000 1.20 B 675,000 0.50 C 750,000 1.40 D 500,000 0.75 Total $3,000,000 A.10.56% B.10.83% C.11.11% D.11.38% E.12.14% 2. DVC stock has a required return of 25%. The expected market return is 15% and the risk-free rate...

Suppose you are a manager of an activist hedge fund named “The Lone Wolf Financials”. On...

Suppose you are a manager of an activist hedge fund named “The Lone Wolf Financials”. On 1 June 2020, you want to assess the corporate governance of Woolworths Group (ASX ticker: WOW) and whether it is an attractive shareholder activism target. Specifically, your analysis should address the followings Analyse WOW’s (Woolworths) corporate governance by answering the following questions: How does WOW’s accounting and stock performance over the past 5 years compared to its peers Does WOW’s CEO have sufficient performance-based...

Question