Synthetic positions are financial positions that mimic another position but use different instruments to do so. A short sale of a stock is a strategy where we borrow shares under the expectation that their prices will drop. If they do, then we buy them back and repay the loan at a profit. In doing so, we are financially obligated for the whole value of the shares which could cost us a large amount of money. A synthetic short sale mimics the short with options but without the large financial cost.

A synthetic short sale is created with a long put and a short call with the same strike price and expiration dates. Bank of America stock is currently trading at $21.71 per share. A May $25 call is trading at $2.75 and a May $25 put is currently trading at $2.25.

1. Evaluate the payoffs of a short sale of BOA and the synthetic short sale at prices of $18, $25 and $28. Don’t forget the premiums on the options in your calculations and that each contract is for 100 shares. Assume your short sale is 100 shares also.
2. Draw a payoff profile for each strategy.
3. Compare the payoffs of each strategy in terms of monetary outlay and payoff at each price.

In a hypothetical country, for an arbitrary good, the demand curve for that good is “Q= 200 - 4 P”. For the supply side, the fixed cost is 100 and the average cost is "0.5Q +20 + 100/Q".

(a) If there is free trade, and the world price p^w = 42. Under perfect competition, what is the consumer surplus and producer surplus? (3 points)

(b) If there is free trade, and the world price p^w = 42. Under monopoly, what is the consumer surplus and producer surplus? (3 points)

(c) In a hypothetical home country, for arbitrary firms and hypothetical goods, the fixed cost is $25, the constant marginal cost is $12, the demand curve for that good is “Q= 200 - 4 P”, the total sales of the whole industry is 1600 units.

In a hypothetical foreign country, the arbitrary firms face the same costs. The only difference here is the total sales, which is 900 units.

Based on PP curve [Notes: P = c + 1/(b x n)] and CC curve, what is the equilibrium number of the firms inside the industry for that home and foreign country? What is the equilibrium number of firms in the whole world if there is free trade? What is the trade pattern for this model? (4 points)

a) In 2008, inflation was unusually high (meaning prices increased more than usual), GDP growth fell, and unemployment increased. Use the aggregate supply and demand model to suggest what might have happened at the beginning of the great recession.

b) In 2009, the US experienced deflation (meaning prices were falling), and GDP actually decreased. Unemployment increased to 10%. Use the aggregate supply and demand model to suggest what might have happened during the second half of the great recession.

c)Assume the economy is in equilibrium. Explain exactly, i.e., one step at a time, why the price level and real GDP will change if the price of oil (a major input in many businesses) increases. Describe the process from the beginning to where the economy reaches a new equilibrium.

d)An economy is currently producing at an equilibrium level of real GDP of $14 trillion. What will happen if government spending (alone, with no other changes) decreases by $100 billion? Will real GDP increase or decrease? Explain why it will change by $100 billion, by less, or by more.

e)Explain why rising prices reduce the spending multiplier effect of an increase in aggregate demand.

Hamburgers are America’s favorite food. Consumers spend more than $100 billion on the beef sandwiches every year. But despite America’s infatuation with burgers, there is considerable dissatisfaction among consumers based on hamburger quality and value. Many customers just aren’t happy with what is served up at market-leading fast-food outlets. They want a better burger, and they won’t hesitate to pay a higher price to get one. Enter Smashburger. Started just a few years ago in Denver, Colorado, Smashburger is now a rapidly expanding chain of more than 100 stores in 17 states. And all this growth happened during a severe economic downturn despiteSmashburger’s average lunch check of $8. Many customers pay as much as $10 or $12 for a burger, fries, and shake. The Smashburgervideo shows how this small startup has pulled off a seemingly impossible challenge.

Discuss the three major pricing strategies in relation to Smashburger. Which of these three do you think is the company’s core strategic strategy?

What effect does Smashburger’s premium price have on consumer perceptions?

Is Smashburger’s success based on novelty alone or will it continue to succeed? Explain.

I am working on these study questions and am having trouble understanding how it all works together. Any help would be greatly appreciated!!

An all equity firm is expected to generate perpetual EBIT of $50 million per year forever. The corporate tax rate is 0% in a fantasy no tax world. The firm has an unlevered (asset or EV) Beta of 1.0. The risk-free rate is 5% and the market risk premium is 6%. The number of outstanding shares is 10 million.

1. Calculate the existing WACC of this all equity or unlevered firm. Calculate the total value of

this all equity firm and the existing share price.

2. The firm decides to replace part of the equity financing with perpetual debt. The firm issues

$100 million of permanent debt at the riskless interest rate of 5%, and repurchases $100 million of equity.

A. Find the new value of the levered firm.
B. Find the new number of shares outstanding, and the new share price.

3. Calculate the new equity Beta, new cost of equity, and new WACC following this capital

structure change. Assume a debt beta of zero.

1. Suppose you have been hired by a research firm trying to understand the market for Widgets (a hypothetical product). Your analysis of the data indicates that the Demand curve for Widgets is estimated to be linear and given by equation Qd = 100 – 2P and the Supply curve for Widgets appears to be linear as well and is estimated as Qs = 2P – 20.

• Graphically draw these two curves, labeling all relevant points (such as intercepts for each line) on the horizontal and vertical axes.
• Given that Demand is Qd = 100 – 2P and Supply is Qs = 2P – 20, your next assignment is to compute the equilibrium Price and Quantity in the market for Widgets. Indicate these values on the graph.
• The firm that hired you has estimated that improvements in Widget quality tastes will cause the Demand curve to change to Qd = 140 – 2P.   If the Supply curve remains the same (Qs = 2P – 20), graphically draw these two curves, labeling all relevant points on the horizontal and vertical axes.
• Given that New Demand is Qd = 140 – 2P and Supply is Qs = 2P – 20, your next assignment is to compute the new equilibrium Price and Quantity in the market for Widgets. Indicate these values on the graph.

Compact fluorescent bulbs are much more efficient at producing light than are ordinary incandescent bulbs. They initially cost much more, but last far longer and use much less electricity. According to one study of these bulbs, a compact bulb that produces as much light as a 100 Wincandescent bulb uses only 23.0 W of power. The compact bulb lasts 1.00×10⁴ hours, on the average, and costs $ 12.0 , whereas the incandescent bulb costs only 76.0 ¢, but lasts just 750 hours. The study assumed that electricity cost 9.00 ¢ per kWh and that the bulbs were on for 4.0 h per day.

(A) What is the total cost (including the price of the bulbs) to run incandescent bulbs for 3.0 years?

(B) What is the total cost (including the price of the bulbs) to run compact fluorescent bulbs for 3.0 years?

(C) How much do you save over 3.0 years if you use a compact fluorescent bulb instead of an incandescent bulb?

(D) What is the resistance of a "100 W" fluorescent bulb? (Remember, it actually uses only 23 W of power and operates across 120 V.)

A firm faces the following costs: total cost of capital = $2,000; price paid for labor = $12 per labor unit; and price paid for raw materials = $4 per raw-material unit.

Instructions: In parts a and b, round your answers to 2 decimal places. In part c, enter your answer as a whole number.

a. Suppose the firm can produce 6,000 units of output this year by combining its fixed capital with 100 units of labor and 450 units of raw materials. What are the total cost and average total cost of producing the 6,000 units of output?

TC=

ATC=

b. Now assume the firm improves its production process so that it can produce 7,000 units of output this year by combining its fixed capital with 100 units of labor and 450 units of raw materials. What are the total cost and average total cost of producing the 7,000 units of output?

TC=

ATC=

c. If units of output can always be sold for $1 each, then by how much does the firm’s profit increase after it improves its production process?

A charity organization hosts a raffle drawing at a fund raising event. The organization sells 2500 tickets at a price of $8 each. Winning tickets are randomly selected, with 30 prizes of $100, 10 prizes of $500, and 1 grand prize of $8000. Suppose you buy one ticket. Let the random variable X represent your net gain from playing the game once (remember that the net gain should include the cost of the ticket). Use the table below to help you construct a probability distribution for all of the possible values of X and their probabilities. Find the mean/expected value of X. (Round to two decimal places.) In complete sentences, describe the interpretation of what your value from #2 represents in the context of the raffle. If you were to play in such a raffle 100 times, what is the expected net gain? Would you choose to buy a ticket for the raffle? (Your response should be a short paragraph, written in complete sentences, to explain why or why not.) What ticket price would make it a fair game, so that, on average, neither the players nor the organizers of the raffle win or lose money? (Round to two decimal places.)

Assume that the stock price is $56, call option price is $9, the put option price is $5,   risk-free rate is 5%, the maturity of both options is 1 year , and the strike price of both options is 58.

An investor  can __the put option, ___the call option, ___the stock, and ______ to explore the arbitrage opportunity.