1. The price of a European call that expires in six months and has a strike price of $30 is $2. The underlying stock price is $29, and a dividend of $0.50 is expected in two months and again in five months. The term structure is flat, with all risk-free interest rates being 10%.

1. What is the price of a European put option that expires in six months and has a strike price of $30? (20 points)

Explain carefully the arbitrage opportunities if the European put price is $2.

The price of a zero-coupon bond with maturity 1 year is $943.40. The price of a zero-coupon bond with maturity 2 years is $898.47. For this problem, express all yields as net (not gross) rates. Assume the face values of the bonds are $1000.

Assuming the liquidity preference theory is valid and the liquidity premium in the second year is 0.01, what is the expected short rate in the second year?

Assuming that the expectations hypothesis is valid, what is the expected price of the 2 year bond at the beginning of the second year?

Price of eggs and milk: The following table presents the average price in dollars for a dozen eggs and a gallon of milk for each month from February through November

2001. Use a TI-84 calculator to answer the following.

If the price of eggs differs by $0.30 from one month to the next, by how much would you expect the price of milk to differ? Round your answer to at least two decimal places.

The price of a European call that expires in six months and has a strike price of $30 is $2. The underlying stock price is $29, and a dividend of $0.50 is expected in two months and again in five months. Risk-free interest rates (all maturities) are 10%. What is the price of a European put option that expires in six months and has a strike price of $30?

The price of an American call on a non-dividend-paying stock is $4. The stock price is $31, the strike price is $30, and the expiration date is in three months. The risk-free interest rate is 8%. Derive upper and lower bounds for the price of an American put on the same stock with the same strike price and expiration date. What are the percentage changes in the values of the two portfolios for a 5% per annum increase in yields?

Price of eggs and milk: The following table presents the average price in dollars for a dozen eggs and a gallon of milk for each month from January through October

2010

.

If the price of eggs differs by $0.25 from one month to the next, by how much would you expect the price of milk to differ? Round the answer to two decimal places.

Please discuss and elaborate on the price ceiling and price floor ? are they efficient? explain the consequences?

Determine if the demand for the following products is price elastic or price inelastic, and explain your answer. i) Box of cereal sold in a grocery store ii) Gasoline as a commodity iii) Hotel rooms for people planning a vacation iv) Hotel rooms for people on business to meet an important client b) What principle do consumers follow to maximize the utility they derive while spending their money to buy the various products they need? (Minimum 50 words) c) Fill in the blanks in the following cost table for Julie's Jam Co. Assume that labor is the only variable input, the time period is one week and labor is paid $250 per week. Number of Workers Total Product Marginal Product Total Variable Cost Total Fixed Cost Total Cost Marginal Cost 1 10 $50 2 25 3 35 4 42 5 46 Determine if the demand for the following products is price elastic or price inelastic, and explain your answer. i) Box of cereal sold in a grocery store ii) Gasoline as a commodity iii) Hotel rooms for people planning a vacation iv) Hotel rooms for people on business to meet an important client b) What principle do consumers follow to maximize the utility they derive while spending their money to buy the various products they need? (Minimum 50 words) c) Fill in the blanks in the following cost table for Julie's Jam Co. Assume that labor is the only variable input, the time period is one week and labor is paid $250 per week. Number of Workers Total Product Marginal Product Total Variable Cost Total Fixed Cost Total Cost Marginal Cost 1 10 $50 2 25 3 35 4 42 5 46 Determine if the demand for the following products is price elastic or price inelastic, and explain your answer. i) Box of cereal sold in a grocery store ii) Gasoline as a commodity iii) Hotel rooms for people planning a vacation iv) Hotel rooms for people on business to meet an important client b) What principle do consumers follow to maximize the utility they derive while spending their money to buy the various products they need? (Minimum 50 words) c) Fill in the blanks in the following cost table for Julie's Jam Co. Assume that labor is the only variable input, the time period is one week and labor is paid $250 per week. Number of Workers Total Product Marginal Product Total Variable Cost Total Fixed Cost Total Cost Marginal Cost 1 10 $50 2 25 3 35 4 42 5 46 Determine if the demand for the following products is price elastic or price inelastic, and explain your answer. i) Box of cereal sold in a grocery store ii) Gasoline as a commodity iii) Hotel rooms for people planning a vacation iv) Hotel rooms for people on business to meet an important client b) What principle do consumers follow to maximize the utility they derive while spending their money to buy the various products they need? (Minimum 50 words) c) Fill in the blanks in the following cost table for Julie's Jam Co. Assume that labor is the only variable input, the time period is one week and labor is paid $250 per week. Number of Workers Total Product Marginal Product Total Variable Cost Total Fixed Cost Total Cost Marginal Cost 1 10 $50 2 25 3 35 4 42 5 46 Determine if the demand for the following products is price elastic or price inelastic, and explain your answer. i) Box of cereal sold in a grocery store ii) Gasoline as a commodity iii) Hotel rooms for people planning a vacation iv) Hotel rooms for people on business to meet an important client b) What principle do consumers follow to maximize the utility they derive while spending their money to buy the various products they need? (Minimum 50 words) c) Fill in the blanks in the following cost table for Julie's Jam Co. Assume that labor is the only variable input, the time period is one week and labor is paid $250 per week. Number of Workers Total Product Marginal Product Total Variable Cost Total Fixed Cost Total Cost Marginal Cost 1 10 $50 2 25 3 35 4 42 5 46 Determine if the demand for the following products is price elastic or price inelastic, and explain your answer. i) Box of cereal sold in a grocery store ii) Gasoline as a commodity iii) Hotel rooms for people planning a vacation iv) Hotel rooms for people on business to meet an important client b) What principle do consumers follow to maximize the utility they derive while spending their money to buy the various products they need? (Minimum 50 words) c) Fill in the blanks in the following cost table for Julie's Jam Co. Assume that labor is the only variable input, the time period is one week and labor is paid $250 per week. Number of Workers Total Product Marginal Product Total Variable Cost Total Fixed Cost Total Cost Marginal Cost 1 10 $50 2 25 3 35 4 42 5 46

In YEAR 1, the price of gadgets is $2, while the price of the single variable input used is $28. A profit-maximizing gadget producer uses 9 units of input to produce and sell 252 units of gadgets, earning profit of $2*252 - $28*9 = $252 In YEAR 2, the price of gadgets is $3, while the price of the single variable input used is $18. A profit-maximizing gadget producer uses 49 units of input to produce and sell 588 units of gadgets, earning profit of $3*588 - $18*49 = $882 A production plan is feasible if it lies BELOW a firm's iso-profit lines. Which of the following production plans (input-output combinations) are feasible for (within the technology set of) a profit-maximizing gadget producer?

(a) use 15 units of input to produce 330 units of gadgets

(b) use 20 units of input to produce 400 units of gadgets

(c) use 25 units of input to produce 450 units of gadgets

(d) use 30 units of input to produce 470 units of gadgets