As an analyst at Bank of America Merrill Lynch, you are evaluating European call futures option and European put futures options. A futures price is currently $50. It is expected to move either to $55 or down to $45 over the next three month. The risk-free interest rate is 8% per annum with continuous compounding.
a.  What is the probability of an up movement in a risk-neutral world?  (sample answer: 35.0%)
b.  What is the value of a three-month call option with a strike price of $49? (sample answer: $1.45)
c.  What is the value of a three-month put option with a strike price of $49? (sample answer: $1.45)

After Enron, WorldCom, and other major corporate scandals that rocked America in the recent past, it seemed that nothing would surprise investors or regulators. However, almost everyone was shocked by revelations that as many as 20 percent of all public corporations may have allowed their officers and directors to “backdate” their stock option awards and account for the awards improperly. For a time, hardly a day went by without another public company’s fraudulent stock option practices being revealed.

A stock option is an award granted under which key employees and directors may buy shares of the company’s stock at the market price of the stock at the date of the award. As an example, assume that Company A’s stock price is $15 per share on January 1, 2007. Further assume that the company’s CEO is awarded 200,000 stock options on that date. This means that after a certain holding (vesting) period, the CEO can buy 200,000 shares of the company’s stock at $15 per share, regardless of what the stock price is on the day he or she buys the stock. If the stock price has risen to, say $35 per share, then the CEO can simultaneously buy the 200,000 shares at a total price of $3 million (200,000 times $15 per share) and sell them for $7 million ($35 per share times 200,000 shares), pocketing $4 million. Stock options are a way to provide incentives to executives to work as hard as they can to make their companies profitable and, therefore, have their stock price increase.

Until 2006, if the option granting price ($15 in this case) were the same as the market price on the date the option was granted, the company reported no compensation expense on its income statement. (Under accounting rule FAS 123R, effective in 2006, the required accounting changed.) However, if the options were granted at a price lower than the market share price (referred to as “in-the-money” options) on the day the options were granted, say $10 in this example, then the $5 difference between the option granting price and the market price had to be reported as compensation expense by the company and represented taxable income to the recipient.

The fraudulent stock option backdating practices involved corporations, by authority of their executives and/or boards of directors, awarding stock options to their officers and directors and dating those options as of a past date on which the share price of the company’s stock was unusually low. Dating the options in this post hoc manner ensured that the exercise price would be set well below market, thereby nearly guaranteeing that these options would be “in the money” when they vested and thus provided the recipients with windfall profits. In doing so, many companies violated accounting rules, tax laws, and SEC disclosure rules. Almost all companies that were investigated “backdated” their options so that they would appear to have been awarded on the low price date despite having actually been authorized months later.

Would a good system of internal controls have prevented these fraudulent backdating practices?

Why would executives and directors of so many companies have allowed this dishonest practice in their companies?

Would a whistle-blower system have helped to prevent or reveal these dishonest practices?

According to the Air Transport Association of America, the average operating cost of an MD-80 jet airliner is $2,087 per hour. Suppose the operating costs of an MD-80 jet airliner are normally distributed with a standard deviation of $162 per hour.

(Round the value of z to 2 decimal places. Round your answers to 2 decimal places.)

5) During December of the current year, Exide company based in America, entered into the following transactions; Dec 10 Sold machinery to company located in Colombia for 6,500,000 pesos. On this date, the spot rate was 365 pesos per U.S. Dollar. Dec 12 Purchased Machine parts from a company domiciled in Japan. The contract was denominated in 600,000 Japan yen. The direct exchange spot rate on this date was $.0392. Required: A) Prepare journal entries to record the transactions above on the books of Exide company. The company uses a periodic inventory system. B) Prepare journal entries necessary to adjust the accounts as of December 31. Assume that on December 31 the direct exchange rates were as follows: Colombia peso $.00265 Japan yen .0353 C) Prepare journal entries to record settlement of both open accounts on January 10. Assume that the direct exchange rates on the settlement dates were as follows: Colombia peso $.00325 Japan yen .0396

6) The following information is available for Jet Company Ltd for 2018. a) On January 1, 2018 Jet paid property tax amounting OMR 100,000 on its rented building for the calendar year 2018. Month of July Jet Company purchased end of the year new Office building amounting to OMR 50,000. Tax paid two equal terms. b) The repairs and Maintenance of property amounting to OMR 10,000. c) A Stock gain of OMR 200,000 from high marketable demand in the month of September 1 and Dec 15 in the year of 2018. d) At the end of the August 2018 Jet Company sold some equipment with a fair value of OMR 50,000 for OMR 40,000. Required: State the OMR amounts that should appear in Jet Company’s Quarterly financial statement report.

As an analyst at Bank of America Merrill Lynch, you are evaluating European call futures option and European put futures options. A futures price is currently $50. It is expected to move either to $55 or down to $45 over the next three months. The risk-free interest rate is 8% per annum with continuous compounding.
a.  What is the probability of an up movement in a risk-neutral world?

(sample answer: 35.0%)
b.  What is the value of a three-month call option with a strike price of $49?

(sample answer: $1.45)
c.  What is the value of a three-month put option with a strike price of $49?

(sample answer: $1.45)

(150 words total)

1.1 The Second Industrial Revolution seemed to bring America to the forefront of the world economically, but it had its downsides. What were they?

1.2 Did any of these downsides lead to the Great Depression? Explain.

1.3 The Second Industrial Revolution marked a shift from manufacturing to service-based industries. How did the New Deal affect this shift?

1.4 Comment on the extent to which F. Roosevelt's personality affected the course of the New Deal.

Developing an Equation from Average Costs The America Dog and Cat Hotel is a pet hotel located in Las Vegas. Assume that in March, when dog-days (occupancy) were at an annual low of 500, the average cost per dog-day was $14. In July, when dog-days were at a capacity level of 4,000, the average cost per dog-day was $7. (a) Develop an equation for monthly operating costs. (Let X = dog-days per month) Total cost = Answer + Answer * X (b) Determine the average cost per dog-day at an annual volume of 24,000 dog-days.

Let’s say we live in a country that gets very cold, in Northern America / Europe. In winter, we monitor the outside temperature, so that heaters can be switched on, inside the house. The idea is that, the colder it is outside, the warmer it should be inside. The heating side of things is just a heater that is either switched on, or switched off. Just from the information that has been given, please discuss this matter in depth. Provide reference to OPEN / CLOSED loop control, FEEDFORWARD / FEEDBACK control and MODULATING / ON_OFF control raised in the discussion.

According to the Air Transport Association of America, the average operating cost of an MD-80 jet airliner is $2,087 per hour. Suppose the operating costs of an MD-80 jet airliner are normally distributed with a standard deviation of $161 per hour. (Round the value of z to 2 decimal places. Round your answers to 2 decimal places.)

(a) At what operating cost would only 23% of the operating costs be less? $ enter the dollar amount at which only 23% of the operating costs would be less

(b) At what operating cost would 65% of the operating costs be more? $ enter the dollar amount at which 65% of the operating costs would be more

(c) What operating cost would be more than 85% of operating costs? $ enter the dollar amount that would be more than 85% of operating costs