Exam 16: Time, Risk and Options

According to the Black-Scholes formula, the price of a European call option depends on its strike price, the current price of the underlying asset, the volatility of the underlying's price, the time to expiration, and the interest rate.

A builder is planning to construct to a departmental store with an investment worth $1,200.He receives proposals from two retailers interested to lease space in it assuring him future cash flows worth $1,000 at the end of the first year and $700 at the end of two years.If the building lasts only for two years and the discount rate is 15 percent, what would be the net present value of this project?

A _____ is a function that takes on a defined value for every point in the sample space.

If A and B are two sets such that set A is a subset of B, and "Pr" represents the probability, then Pr(A and B) will be:

Which of the following is true of an option?

Derive the optimum portfolio of an investor seeking only to minimize the variance of returns.

Which of the following is true of the present value of an investment?

In the figure given below A and B are two sets, such that Pr[A and B]=1/3, Pr[A]=2/4, Pr[B]=3/4. Figure 16-1 -Refer to Figure 16-1.Pr[A or B] will be:

Rational individuals prefer to consume goods during the current year rather than in the future because of:

Briefly describe the different conditions which affect the value of a real option.

For a risk-averse person, an indifference curve representing the different combinations of variance of return and expected return will be downward sloping and convex to the variance of return axis.

Which of the following strategies are adopted by a business tycoon when the first new management of the purchased company fails?

Calculate the discounted value of $2,875 to be received from a bank a year later at an interest of 15 percent per annum.

Assume that the interest rate on a federally insured deposit declines from 15 percent per annum to 10 percent.If an individual holding a U.S.Treasury bill worth $2,500 plans to sell it after this drop in interest rate, he would realize (approximately) a:

How is the optimal degree of diversification of a portfolio determined?

Point out the relevance of the Bayes' theorem.

If A and B are two disjoint sets, and "Pr" represents the probability, then Pr[A or B] will be:

What is the difference between the present value of $550 to be received after 3 years and after 5 years from now at an annual interest of 15 percent?

A _____ is a combination of an annuity that consists of coupon payments and a terminal payment of the par value.

The Bayes' theorem states that the conditional probability of event B given event A depends on the conditional probability of event A given event B and the independent probability of event B.