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Tju [1.3M]
3 years ago
6

Assume the stock return for the next month is a random variable that follows a Normal distribution with the mean 1.5% and the st

andard deviation 5%, which is the true probability. The interest rate is 0.25% for the next month. Suppose you are the owner of a big investment bank, and one of your VIP clients wants to buy a customized derivative from you. The payoff of such derivative is $4mil if the stock return for the next month is larger than 0.25%, and $1mil if the stock return for the next month is smaller than 0.25%. Assume the probability that the stock return turns out exactly 0.25% is zero. Compute the price of this customized derivative. Your client will pay you extra fees in addition to the price of this derivative. This computation is extremely important for your business. If your valuation is too high, the client will buy the same derivative from other banks, and you lose the fees. If your valuation is too low, you are selling a product with an expected loss.
Business
1 answer:
EleoNora [17]3 years ago
8 0

Answer:

Check the explanation

Explanation:

The price of the original asset is the same amount as the expected future price which are being discounted at the risk-free rate.

Price of Customized Derivative= Probability of return>0.2%*Pay off+ Probability of Return<0.2%*Payoff/(1+r)^T

= 0.5*$4000000+0.5*$1000000/(1+0.002)^1

=2000000+500000/1.002

=2000000+499001.99

$2499001.99

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Your bank card has an APR of 18% and there is a 2% fee for cash advances. The bank starts charging interest on cash advances imm
Marina86 [1]

Answer:

$42

Explanation:

APR = 18% , month rate = 18%/12 = 1.5%

Fee for cash advance = 2%

Cash advance of the first day of month = $1,200

Finance charge = Cash advance * (Monthly rate + Advance cash fee)

Finance charge = $1,200*1.5% + $1,200*2%

Finance charge = $18 + $24

Finance charge = $42

So, the approximate total finance charge i will pay on this cash advance for the month is $42

4 0
2 years ago
One method used by some analysts to estimate the future value of a stock is the dividend growth model. This model would probably
Ray Of Light [21]

Answer:

I am sure that it is D. a large cap stock

Explanation:

Large cap stocks already have a positive growth sentiment and

based on how much dividends are paid out they can estimate the future

value of a stock.

8 0
2 years ago
The controller for Clint Eastwood Co. is attempting to determine the amount of cash to be reported on its December 31, 2014, bal
NISA [10]

Answer:

The amount of $8,707,170 of cash and cash equivalents to be reported on Eastwood Co.

Explanation:

Cash reported  December 31,2014 = Commercial savings account + Commercial checking account  + Money market fund + Petty cash fund + Commercial paper  + Currency and coin on hand

=$698,340 + $830,320 + $5,044,440  + $1,900 + $2,124,020 + $8,150

= $8,707,170

​Therefore, The amount of $8,707,170 of cash and cash equivalents to be reported on Eastwood Co.

8 0
3 years ago
Springfield mogul Montgomery Burns, age 80, wants to retire at age 100 so he can steal candy from babies full time. Once Mr. Bur
masha68 [24]

Answer:

Springfield mogul, Montgomery Burns

How large of an annual deposit must be made to fund Mr. Burns retirement plans:

= $94,644,751.67

Explanation:

a) Data and Calculations:

Age of Mr. Burns now = 80 years

Retirement age = 100 years

Annual withdrawal at the beginning of each year for 10 years = $500 million

Special offshore account pays interest = 18% annually

Investment for funding retirement:

Deposits = 20 equal end-of-the year deposits in the same special offshore account above.

b) Calculation of Future value of annual deposit after 20 years:

FV (Future Value) $13,877,572,093.01

PV (Present Value) $2,651,510,914.01

N (Number of Periods) 10.000

I/Y (Interest Rate) 18.000%

PMT (Periodic Payment) $500,000,000.00

Starting Investment $0.00

Total Principal $5,000,000,000.00

Total Interest $8,877,572,093.01

c) Calculation of Annual Deposit to reach the future value target of $13,833,567,810.87:

FV (Future Value) $13,877,567,810.87

PV (Present Value) $506,609,362.98

N (Number of Periods) 20.000

I/Y (Interest Rate) 18.000%

PMT (Periodic Payment) $94,644,751.67

Starting Investment $0.00

Total Principal $1,892,895,033.42

Total Interest $11,984,672,777.45

d) Mr. Burns will need to contribute $94,644,751.67 at the end of each period to reach the future value of $13,877,572,093.01.  Both the future value of deposits of $13,877,567,810.87  and the annual periodic payment of $94,644,751.67  are determined using online financial calculator.

4 0
3 years ago
Observe the Sales Budget and determine which primary responsibility the managerial accountant uses todetermine which quarter gen
pantera1 [17]

Answer:

"Directing" seems to be the right response.

Explanation:

  • Directing seems to be the major concern of the financial analyst to ascertain whether the significant proportion obtained that much sales figures for every unit cost of production throughout addition to changing the marketing campaign.
  • Strategy formulation, trying to organize, staff numbers would not have any significance if the management function doesn't take place.

Therefore the method above is the right one.

4 0
2 years ago
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