STAT 473 S21 Chapter 01 Homework PDF

Preview

Summary

Hw 1...

Description

STAT 473 Spring 2021 Chapter 1 Homework 1. (4 points) List the four uses of derivatives. 2. There are three perspectives on derivatives. Please identify which perspective is represented by each party below. Each perspective will only be used once. (1 point each) Fifth Third Bank, which is 2/3 better than Bank One, wants to protect itself from a potential change in interest rates. Therefore, Fifth Third Bank purchases an interest rate swap. Fifth Third Bank retains Morgan Stanley Investment Bank to identify a counter party to take the interest rate risk. A professor at Purdue University decides to study this transaction to research the impact of interest rate swaps in reducing the interest rate risk experienced by banks.

Fifth Third Bank represents this perspective: ____________________________________

Morgan Stanley Investment Bank represents this perspective: ___________________________

The Purdue professor represents this perspective: _______________________________

3. (3 points each) The bid-ask prices on the stock of Southwest Airlines are 29.00 – 29.25. a. Dan purchases 75 shares of Southwest Airlines. The commissions on his purchase are 49.50 per trade. Compute his net debit for this transaction. b. Jack purchases 200 shares of Southwest Airlines. The commissions on his purchase are 1.00% of the purchase amount. Compute his net debit for this transaction. c. Lauren shorts 100 shares of Southwest Airlines. The commissions on her short sale are $0.25 per share. Compute her net credit for this transaction.

4. (4 points) Alex buys 100 shares of the stock of Apple at the same time that Neil sells 100 shares of the stock of Apple. The commission on Alex’s purchase is 0.50 per share while the commission on Neil’s sale is 0.3% of the price. Alex pays 31,150 to purchase his 100 shares. The total transaction costs incurred by both Alex and Neil are 243.00 Calculate the Bid Price for one share of Apple.

January 21, 2021 Dan Rubin

STAT 473 Spring 2021 Chapter 1 Homework 5. (5 points) David wants to buy X shares of Gillette stock. Gillette stock has a bid price of 100 and a bid-ask spread of 1. David can purchase the stock using either Bach Brokerage or Stowe Investments. Bach charges a flat commission of 150 without regard to the number of shares purchased. Stowe charges a commission that is 0.5% of the purchase price. Determine the values of X for which David should use Bach Brokerage.

Use the following information for Questions 6 and 7: The bid-ask spread for Southwest Airlines is always 0.25. You sell 100 shares of the stock of Southwest Airlines short when the bid price is 35.00. At the time of the sale, you pay a commission of 1%. Two months later, you cover your short position by buying 100 shares of stock of Southwest Airlines when the bid price is 30.75. Once again, you pay a commission of 1%. 6. (5 points) Calculate your profit on this transaction assuming there are no interest costs associated with the transaction. 7. (5 points) What would the bid price need to be for you to break-even when you cover this trade assuming there are no interest costs associated with the transaction

8. (2 points) Michael sells short 100 shares of Sports Clips stock having a market value of $20.00 per share. Michael’s broker requires this short sale to be securitized by $2,500 of collateral. How much is the haircut Michael’s broker is requiring? 9. (1 point) A crash of the financial markets is a diversifiable risk. True or

False

January 21, 2021 Dan Rubin

STAT 473 Spring 2021 Chapter 1 Homework 10. (2 points – ½ point each) Circle any of the following that are NOT a derivative: The S&P 500 Index A Homeowner’s Insurance Policy The right to buy jet fuel in six months for a price of $3 per gallon Southwest Airlines Stock

January 21, 2021 Dan Rubin...