Advanced corporate finance - publié le 23/06/2011

Thèmes abordés

ADVANCED CORPORATE FINANCE ; iseg ; ism; assignment

Résumé du document

1) You have two stocks with the Expected Return (ER), Standard Deviation (SD), and Correlation Coefficient in the attached list.

a) Show how you can create a portfolio with these two stocks which would have an ER of 8%. What is the SD of this portfolio?

b) Now you also have a Risk-Free Asset with a return of 2.5%. Show how you can combine it with Stock A in order to create a portfolio with a SD of 3%. What is the ER of this portfolio?

c) Now you want to create a portfolio with just the Risk-Free Asset and Stock B. Show how you can create a portfolio with these two securities that has an ER of 13%. What do you need to do to create this portfolio?

d) Explain the concept of Efficient Markets Hypothesis and what the difference is between the Weak, Semi-Strong, and Strong forms of it. Do you agree with it?

2) You put €15,000 into a group of French stocks on January 1. On June 30, your portfolio's value was the amount listed in the attached list. The next day you added another €3000 to the portfolio.

a) Calculate your annual return on the portfolio, if no other money was added or removed, and the value on December 31 was €18,360.

b) Inflation was the amount in the attached list. What was your real annual return on your portfolio? What does this mean?

c) During the same year the CAC40 started at 2500 on January 1. It ended the year with the value in the attached list. Considering this, do you think your stock portfolio did well or did badly? Explain.

d) Explain what the CAC40 is and how its value is calculated. (You may need to do a little outside research to answer this question.)

3) You have purchased stock for $35/share. You want to sell the stock once you have made the acceptable profit in the attached list. However, you do not want to lose any more than the acceptable loss in the attached list.

a) Which order (market, limit, or stop-loss) should you make, and at what price, to ensure your stock is sold once you have earned your acceptable profit? Which order (market, limit, or stop-loss) should you make, and at what price, to ensure your stock is sold to ensure you do not lose any more than your acceptable loss?

b) Assume that you have bought the stock on margin, and borrowed 40% of the purchase price. You purchased 100 shares. The maintenance margin requirement is in the attached list. If the price of the stock falls to $22/share, will you receive a margin call - i.e. will you have to add more money to your account? Explain your calculation.

c) Assume the price falls to $20/share and you sell your shares, which you purchased on margin at the interest rate in the attached list. Calculate your percentage return on this investment?

d) Explain what short sales are and why they are dangerous for investors. Also explain why governments often restrict their use.

4) You have decided to buy stock options. You have purchased a call option on Stock A with the exercise price and premium per share in the attached list. You have also purchased a put option on Stock B with the exercise price and premium in the attached list.

a) Calculate the breakeven price of each of the options, i.e. at what price would the stock have to be so that you have not gained or lost any money by buying each option.

b) On the day you purchase the options, the two stocks sell for the prices per share on the attached list. Calculate the time value of each option.

c) On the expiration date of the options, Stock A sells for $53/share and Stock B sells for $97/share. Calculate the combined total net profit you have earned by buying the two options (after subtracting the premiums paid).

d) Explain the five factors discussed in class that affect the premiums of put and call options. (e.g. time to maturity).

Extraits

[...] Do you agree with it? The concept of efficient-market hypothesis also call EMH affirms that financial markets are “informational efficient” and this concept was developed in 1960's by Eugene Fama. This concept means that it is hard to beat the market because prices have integrated and they reflected all information of the market. The information publicly is only available at the time the investment is made. With the EMH it is chance which permit to gain money because prices will reflect the information. [...]

[...] Explain what the CAC40 is and how its value is calculated. (You may need to do a little outside research to answer this question.) The CAC40 is the French stock market index that tracks the 40 largest French stocks based on market capitalization on the Paris Bourse. It permits to represent the 40 most significant values among the 100 highest market caps on the Paris Bourse which is now call Euronext Paris. The “Conseil Scientifique” reviewed quarterly the CAC40 index composition. [...]

[...] Explain your calculation. We have that data: Maintenance Margin=40%; Interest Rate=18% Buy Stocks at: $35/share and Sell Stocks at $22/share So, the initial margin is: Time 0 $35 x 100 = $3,500 stocks Loan: 40% = $1,400 Equity = $3,500 - $1,400 = $2,100 Equity % = $2,100 / $3,500 = 0.6 = 60% Not restricted and Not under margin Time 1 $22 x 100 = $2,200 stocks Loan: 40% = $1,400 Equity = $2,200 - $1,400 = $800 Margin = $800 / $2,200 = 0.3636 = 36,4% We are restricted and under margin We notice that our margin is on the Time but we need a maintenance margin at 40%. [...]

[...] What is the SD of this portfolio? We have: Stock Stock ER=14%, SD=14%; Correlation Coefficient= 0.9 We know that: W = Weight of the stock σ = Standard Deviation ρ = Correlation coefficient We have that information: WA and WB are unknown; σ and σB = ρ = 0.9 Expected Return = WA σ A + WB σ B and we know that WA+WB=1 or = WA x 0.09 + WB x = 0.09 + 0.14 WB 0.08 = 0.09 – 0.09 WB + 0.14 WB 0.08 = 0.09 + 0.05 WB 0.08 - 0.09 = 0.05 WB - 0.01 = 0.05 WB WB= 0.01 / 0.05 = - 0.2 = - 20% So, we will have WA = 1-WB = 1 + 0.2 = 1.20 = 120% But this is impossible because we cannot have a Stock which is negative and we have WB=-20% We notice that with that data it is impossible to solve this problem because the average of my data is too high compare to the ER which is only 8%. [...]

[...] Calculate the time value of each option. We have that data: Stock A Price Stock B Price =$100 Time Value of Stock Intrinsic Value $50 - $54 but the intrinsic value could not be negative so the intrinsic value of stock A is Time Value Stock A = Premium – Intrinsic Value Time Value Stock A = - = The Time Value of the Stock A is per shares. Time Value of Stock Intrinsic Value $100 - $99 = Time Value Stock B = Premium – Intrinsic Value Time Value Stock B = - = The Time Value of Stock B is per share On the expiration date of the options, Stock A sells for $53/share and Stock B sells for $97/share. [...]