Suppose that, in each period, the cost of a security either goes up by a factor of u = 2 or down by a factor d = 1/2. Assume the initial price of the security is $100 and that the interest rate r is 0.

a). Compute the risk neutral probabilities p (price moves up) and q = 1−p (price moves down) for this model

b). Assuming the strike price of a European call option on this security is $150, compute the possible payoffs of the call option given that the option expires in two periods. It may help to sketch a diagram of the possible security price movement over two periods.

c). What is the expected value of the payoff of the call option?

d). What should the no-arbitrage price of the call option be?

Question 1

Suppose that the price of bread increases from $1/loaf to $2/loaf, resulting in the quantity demanded of bread to decrease from 200 loaves to 160 loaves. What is the arc elasticity of demand for bread? Is bread elastic or inelastic? Why? Is demand for bread elastic or inelastic over this price range? (20 points)

Question 2

If a firm wants to increase revenue on its product. Clearly explain why the owner needs to know whether their product is elastic or inelastic in deciding to change the price of their product. (15 points)

Question 3

Use graphs to demonstrate the income elasticity of:

1. Steaks,
2. Hamburgers, and
3. Ramen noodles.

What assumption did you make about each product in regard to its income elasticity? Use the appropriate economic terms in describing your assumptions. What is the economic significance of this for US agriculture? Explain. (30 points)

Question 4

Consider a competitive market for pork with the quantity demanded (per year) at various prices are given as follows:

Calculate the price elasticity of demand when the price is $80/kg. (5 points) Calculate the price elasticity of demand when the price is $00/kg. (5 points) Calculate the arc elasticity between price of $80/kg and $100/kg. (5 points)

Question 5

What impact will animal rights laws that cause producers to change their production practices have on the price and quantity of meat? Hint: be careful here… think about both demand and supply. (10 points)

Question 6

The own-price elasticity is related to changes in quantity demanded. Cross-price elasticities are related to changes in demand. Explain this statement. (10 points)

• In this script, write MATLAB code to create an array A of size 100 × 3. The first column should contain random numbers between 0 and 10. The second column should also contain random numbers between 0 and 10. The third column should contain random integers between 20 and 50. The first two columns represent the x and y coordinates of a map, respectively. The third column represents the height of buildings. For example, if the first row of A is equal to [3.4 4.5 28], this means that there is a building of height 28 at location (3.4, 4.5) in the map. Because array A has 100 rows, there will be 100 buildings located at random points in the map. • Then, save array A in a file using the MATLAB function save. You may select the name of the file yourselves. • Then, plot the first column of array A vs the second column of array A, using ‘*’ (i.e., the points will be plotted as stars) so that you can see the 100 locations of the buildings. • Finally, after you save the array, clear all variables by placing a clear all at the end of the MATLAB script. • In this script, write MATLAB code to first read the file that you saved in Part A. To read the file, use the MATLAB function load. After you read the file, array A should again become available to you. • Then, write code to move the data from array A to a cell array C of size 10 × 10 in the following way: ◦ The element C{1,1} in C should be an array containing all building heights with x coordinates between 0 and 1 AND y coordinates between 0 and 1. ◦ The element C{2,1} in C should be an array containing all building heights with x coordinates between 1 and 2 AND y coordinates between 0 and 1. ◦ The element C{1,2} in C should be an array containing all building heights with x coordinates between 0 and 1 AND y coordinates between 1 and 2. ◦ The element C{2,2} in C should be an array containing all building heights with x coordinates between 1 and 2 AND y coordinates between 1 and 2. ◦ The element C{3,2} in C should be an array containing all building heights with x coordinates between 2 and 3 AND y coordinates between 1 and 2.

ASP Pharmaceuticals has decided to go ahead and start clinical trials on a new
drug. The total R&D costs are estimated to reach $750,000,000 with clinical trials
mounting to $120,000,000. The current market size is estimated to be 2,000,000 and is
expected to grow at 3% every year. The market share ASP hopes to capture in the first year
is 8%, and is projected to grow by 20% each year for the next 4 years. A monthly
prescription is anticipated to generate revenue of $350 while incurring variable costs of
$150. A discount rate of 9% is assumed.

a. What is the net present value over the first four years?

b. By which year ASP can expect to realize a positive cumulative profit? What is the
cumulative profit of this year?

c. Conduct appropriate what-if analyses to investigate how the cumulative profit for
the next four years and the net present value change if unit price varies between
$250 and $450 with increment of $20 (the table below is to show the format of the
solution, you may submit your answers in the EXCEL file).
Unit Price Year 1 Year 2 Year 3 Year 4 NPV
250
270
290
310
330
350
370
390
410
430
450

d. Conduct appropriate what-if analyses to investigate the joint effect of unit cost and
market share growth rate on net present value. (For consistency, let unit cost vary
between $100 and $200 with increment of $10, and let market share growth rate
vary between 10% and 30%, with increment of 2%. The table below is to show the format of the solution, you may submit your answers in the EXCEL file).

format of the solution, you may submit your answers in the EXCEL file).

Market Share Growth Rate

Unit Cost 0.1 0.12 0.14 0.16 0.18 0.20 0.22 0.24 0.26 0.28 0.3
100
110
120
130
140
150
160
170
180
190
200

e. Use a tornado chart to identify the most important 3 variables that affect the NPV
(you may submit the tornado chart in the EXCEL file).

A distributor of computer parts purchases a specific component from a supplier in lots of 1000 units. The cost of purchasing a lot is $30,000. The supplier is known to supply imperfect lots. In other words, a lot received by the distributor may contain defective units. Historical data suggest that the proportion of defective units in a lot supplied by this supplier follows the following probability distribution:

The distributor inspects the entire lot for defective units before selling the units to PC repair shops at a price of $45 per unit. The inspection process is error-proof so all defective units in a lot are detected and replaced by the distributor. It costs $20 for the distributor to replace a defective unit. The distributor has recently learned that the supplier offers a guarantee policy through which the supplier will assume the cost of replacing defective units in excess of the first 100 faulty units found in a given lot at no cost. [This means that the first 100 defective units found in a lot are replaced by the distributor for $20 per unit; however, all additional defective unit (if any) found in a lot are replaced by the supplier at no cost to the distributor.] This guarantee policy may be purchased by the distributor prior to the receipt of a given lot at a cost of $1000 per lot. The distributor wants to determine whether it is worthwhile to purchase the supplier’s guarantee policy.

Create a complete decision tree by using PrecisionTree^®.  

Make a recommendation: What should the distributor do, using EMV as the decision-making criterion? Why?

Perform sensitivity analysis: Perform a one-way sensitivity analysis using PrecisionTree ^®  on the optimal decision by letting the cost of replacing a defective unit vary from $10 to $30 in 11 steps and the cost of purchasing the supplier's guarantee policy vary from $400 to $1600 in 7 steps. Comment on your findings.

Input Data:

Number of units in a lot 1000

Cost of purchasing a lot $30,000

Cost of repairing a defective unit in a lot $20

Cost of purchasing supplier's guarantee policy (per lot) $1,000

Selling price for a unit of the component $45

Distribution of defective units in a lot

Proportion Probability

0.05 0.50

0.10 0.25

0.25 0.15

0.50 0.10

Question : does CA allow for the exemptions in every case of bankruptcy?

There are a lot of rules involved when filing for chapter 7 bankruptcy especially in CA are there any fees for filing bankruptcy in CA? Are your assets unprotected if they exceed the amounts listed?

Discussion:

defines and differentiate between Chapter 7 and Chapter 11 bankruptcy.

Chapter 7 bankruptcy is the simplest and most common form of bankruptcy. In Chapter 7, if the debtor has assets not protected by an exemption, a court appointed trustee may sell the assets and distribute the net proceeds to creditors according to the priorities established in the Code.

This chapter of the Bankruptcy Code generally provides for reorganization, usually involving a corporation or partnership. A chapter 11 debtor usually proposes a plan of reorganization to keep its business alive and pay creditors over time. People in business or individuals can also seek relief in chapter 11.

Explain the differences between Chapter 7 bankruptcy and Chapter 11 bankruptcy.

The most common type of bankruptcy is filed which accounts for 70 percent of all filings. The trustee sells the assets and distributes all proceeds first to secured creditors and then to unsecured creditors. Depending on the outcome of the asset sale, creditors can receive anywhere between 0 and 100 percent of their claims against the bankrupt company. Once the bankruptcy proceeding is complete, any remaining debts are discharged and the company disappears.Straight bankruptcy proceedings can be started by filing either a voluntary or an involuntary petition. A voluntary case starts when the debtor files a petition with a bankruptcy court, stating the names and addresses of all creditors, the debtor's financial position, and all property the debtor owns. On the other hand, creditors start an involuntary petition by filing with the bankruptcy court. As soon as a petition is filed in a bankruptcy court, all creditors' claims against the debtor are suspended. Called an automatic stay, this provision prevents creditors from collecting any of the debts the debtor owed them before the petition was filed, In other words, no creditor can begin or continue to pursue debt collection once me petition is filed.Not every piece of property the individual bankrupt debtor owns is subject to court attachment. According to the Bankruptcy Reform Act certain assets are exempt, although each state establishes its own exemptions. The law does not allow a debtor to transfer the ownership of property to others to avoid its seizure in a bankruptcy.

In the state of California a Chapter 7 bankruptcy allows you wipe out your debts and get a “Fresh Start”. Chapter 7 bankruptcy is a liquidation where the trustee collects all of your assets and sells any assets which are not exempt. Certain debts cannot be discharged in a Chapter 7 bankruptcy, such as alimony, child support, fraudulent debts, certain taxes, student loans, and certain items charged.

When you file bankruptcy in California you may also use certain federal exemptions in addition to your California exemptions.

California has two sets of exemptions. You must choose one or the other.

Soap Inc.'s $100 par value preferred stock pays a dividend fixed at 5% of par. To earn 10% on an investment in this stock, you need to purchase the shares at a per share price of?

$80.0

$62.5

$50.0

$75.7

The graph represents the market for artichokes (in pounds per week) at a Midwest farmers' market. If the equilibrium price is $3 per pound and the equilibrium quantity is 100 pounds per week, what is the economic surplus in the market for artichokes each week?