Fin 321 Cheat sheet for Final PDF

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Final exam...

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+ Assumptions+Options:+ 1. Under!the!assumption!which!option!do!you!reflect.! Aggressive!Bullish!–!Buy!Call/!Conservative!bullish!sell!put! Aggressive!Bearish!–!Buy!Put/!Consertvative!bearish!sell!cal! 2. What!is!the!B/E?! B/E!=!Strike!Price!+!Premium!! Gross!Profit!=!Strike!Price!– !Sp $104200-$100,000!=!4200! Net!Profit!=!! o Buy!Call!=!Spot!–!(Strike!Price!–!Premium) ! o Sell!Call!=!Spot!–!(Strike!Price!+!Premium)! o Buy!Put!=!-Spot!+!(Strike!price!–!Premium)! o Buy!Put!=!-Spot!+!(Strike!price!+!Premium)! o ! 3. Suppose!you!have!$1M!how!much!profit?!!ROI!per!annum! A!=!Net!Profit!! B!=!How!many!contracts!you!can!buy!!!!!!$Amount/Option!Premium!! ROI!=!(A*B)/Initial!$!Investment!*!360/(Option!Expiration!Days)!! ! Speculation+In+General! $100,00!SF!6!months! 1. Speculate!on!Spot!Basis! 2. Speculate!the!Forward!Basis! 3. Speculate!on!Options!Basis! 4. Compare!! S1=!Spot!now! S2!=!Speculative!Spot! F180 =!Forwards ! Call!or!put!Strike!Price!!

! ! ! !!!!! ! START! !

$102546,.57-$100,000!=!$2546.57!Profit! ROI!=!$2546.57/100,000!*360/180!*100!!!!!!!! =!5%!Per!Annum!

$100,000!

$104200+

!

! .6000/SF! X! 123.50! !

!

! ! !

S1!SF/$ ! .5851!

180!days!

170910.96! SF/$!

!

! Spot/Forward+ + 1!Contract!= !62500!options! ! SF!20M/62500!=!320!Contract!! +

! ! ! ! ! ! ! ! ! !

SF!170,910.96!

Direct+Quotation:+Expressed!in!home!currency!terms! %∆!=!Ending!–!Beginning/Beginning!*100! Indirect+Quotation:+Expressed!in!FC!terms!! %∆!=!Beginning!–!Ending/Ending!*100!

! Doyle&is&a&trader&with&a&minimum&stake&of&250k&euro&wish&to&speculate& on&movement.&His&investors&expect&n&annual&return&in&excess&of&25%.&All& accounts&and&expections&are&in&US&dollars.&Arthur&is&convinced&that&the& British£&will&slide&significantly&possibly&to&$1.32&–&in&the&coming& 30&to&60&days.&The¤t&spot&rate&is&1.4260/Euro.&Doyle&wishes&to& buy&a&put&on£s&which&will&yield&the&25%& return&expected&by&his& investors.&Which&of&the&following&put&options&would&you&recommend& the&purchase.&Should'buy'a'put' S1!=!$1.4260!! S2!=!$1.132! Put+#4+ 1. B/E!x!=!$1.35667/pound! 2. GP!$.04/pound! 3. NP!.03667!pound!! 4. ROI!2753003/250000!*360/60!=!6606%! Rule+(20-2)%! Upfront!2%!pay!! 60!days!$1million!25%! have!them!pay!2%!up!front.!! Success!fee!is!20%!of!profit! You!get!$1million!x!12.33x.2!-!$2.455m! Client+ $12.33M!-!.02M-2.466=!$9.844M!

What is Abenomics? When Japanese Prime Minister Shinzo Abe was re-elected in December of 2012, he stated that he would see Japan through its economic problems which included deflationary recession and stagnating exports. He promoted a bold monetary policy with a flexible fiscal policy and growth strategy that encourages private investment. He targeted a 2% annual inflation rate and Abenomics involves large-scale public work projects, yen depreciation to spur exports, quantitative easing, incentives for public investment and the buying of Japanese government bonds by the bank of Japan. Problem is that consumers would recognize a fall in overall demand resulting in lower prices as a reason to postpone purchases to get a better price. The decrease in the price of the yen promotes export profitability which leads to rising stock prices. The real interest rate can be decreased by decreasing the nominal interest rate or increasing expected inflation rate. Japans case expected interest rate is increasing so that lowers real interest rate and promotes spending. What theories or formulas of International Finance are behind? Abenomics puts importance on the J-Curve expecting that substantial devaluation of the yen due to a massive program of quantitative easing by the central bank and bank of japan would lead to a strengthening of Japan’s trade balance, which would deliver economic stimulus. Like the definition for J-curve, the initial trade balance got worse but has started to recover in recent time meaning that the delayed effects from the weaker yen may finally be taking effect. Evaluate Abenomics in your own way. I believe that Abenomics ultimately tried to deflate (weaken) the value of the Yen. Abe’s three-pronged approach, dubbed "Abenomics," combines fiscal expansion, monetary easing, and structural reform. Its immediate goal is to boost domestic demand and gross domestic product (GDP) growth while raising inflation to 2 percent. However, major challenges remain. Despite massive government stimulus, growth is tepid, inflation is below target, ballooning debt remain, and difficult structural reforms have languished. Without addressing long-overdue structural reforms, deflation in the Japanese economy will continue, and the Yen will consequently further weaken. Monetary easing The first reason in Abenomics for a weaker Yen is an aggressive shift towards Monetary Easing. Double the amount of yen and double the purchase of Japanese government bonds and ETFs. By purchasing Japanese government bonds Kuroda wanted to re-distribute the money into business and households. In accordance with the BOJ’s monetary easing policy, the Yen weakened from 80/$ to 99/$ in three months. Since the end of 2012, the Yen has fallen 50% against the dollar, and even reached 120/$ at one point. Economists were worried about rapid inflation tied to monetary easing, but weak fiscal health and unsuccessful structural reform will continue to deflate the Yen. Fiscal Stimulus Implementing large-scale public work projects. Japan’s public debt ratio is above 200% of GDP which is among the worst of developing economies. The second reason for a weakened Yen is Weak Fiscal Health. Abe's hefty stimulus package of 20.2 Trillion Yen focused on building critical-infrastructure projects, such as bridges, tunnels, and earthquakeresistant roads. Corporations proposed to privatize infrastructural reforms—privatization would spur job growth and infrastructural projects. Increased job growth and corporate spending would encourage money flow in the economy, consequently inducing inflation. However, infrastructural reform was not privatized and large infrastructural investments weren’t planned. As a result, Japanese fiscal health didn’t show signs of improving, which only prolonged the deflation of the Yen.

Structural Reforms Finally, unsuccessful structural reform is expected to further prolong deflation and weaken the Yen. Structural reforms would include scaling back business regulations, liberalizing the labor market and agricultural sector, cutting corporate taxes, and increasing workforce diversity. One proposal was to lower corporate taxes to revitalize corporate investments and job hiring. This would’ve been a major move towards corporate reinvestment but wasn’t necessarily feasible for the government. The opposite occurred and the government needs more revenue—the Japanese government increased the national consumption tax from 5 to 8%, further depressing consumer spending. Unsuccessful structural reform is likely to further deflation and weakening of the Yen....