Scribd
Upload
71 views3 pages

Financial Economics: Rate of Return Analysis

The document provides information and questions for a homework assignment on financial economics. It includes: 1) A calculation of rates of return for a price-weighted stock index over two periods and the value of the divisor in the second period assuming one stock had a stock split. 2) An explanation of how to calculate profit/loss on a corn futures contract based on the futures and expiration prices quoted in cents per bushel. 3) A multiple choice question testing understanding of a call option with an in-the-money strike price at expiration. 4) An open question for discussion on whether to purchase an endowment insurance plan that pays a lump sum after 12 years depending on fund performance.

Uploaded by

LuisLo
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
71 views3 pages

Financial Economics: Rate of Return Analysis

The document provides information and questions for a homework assignment on financial economics. It includes: 1) A calculation of rates of return for a price-weighted stock index over two periods and the value of the divisor in the second period assuming one stock had a stock split. 2) An explanation of how to calculate profit/loss on a corn futures contract based on the futures and expiration prices quoted in cents per bushel. 3) A multiple choice question testing understanding of a call option with an in-the-money strike price at expiration. 4) An open question for discussion on whether to purchase an endowment insurance plan that pays a lump sum after 12 years depending on fund performance.

Uploaded by

LuisLo
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd

HE3007 Financial Economics

HW 2

CH2

Based on the information given, for a price-weighted index of the three stocks
calculate:
a. the rate of return for the first period (t = 0 to t = 1).

( ∑ of individual share price)


Key Point to note, Price Weighted Index Calc =
(total number of counters)

($ 70+ $ 85+ $ 105)


Rate of Return at T0: = 86.6
(3)

($ 72+$ 81+ $ 98)


Rate of Return at T1: = 83.6
(3)

83.6−86.6
Rate of Return from T0 to T1: ×100 = 3.5%
86.6

b. the value of the divisor in the second period (t = 2). Assume that Stock A had a 1
to 2 stock split during this period.

Key point to note, divisor is the denominator to maintain the overall index when
there are stock splits influencing the price!

($ 72+$ 81+ $ 98)


We know that from (1) = Rate of Return at T1: = 83.6
(3)

($ 36+ $ 81+ $ 98)


Therefore : = 83.6
(d )

d = 2.57

c. the rate of return for the second period (t = 1 to t = 2). 


There is no change as the market did not grow.

2. You purchased a futures contract on corn at a futures price of 350 and at the time
of expiration the price was 352. What was your profit or loss?  (Hint: The prices are
quoted in cents per bushel.)
A. $2.00
B. -$2.00
C. $100
D. -$100
E. $75.00

Key concept:

Futures are contracts that enable buyers and sellers to negotiate purchases or sales
of commodities at future prices.

Note: 1 contract = 5000 bushel

Therefore 1 contract at 3.50 per bushel = $17,500

Also, 1 contract at 3.52 per bushel = $ 17,600

In this case, you are obliged to purchase it at a future price at 350, mkt price is 352,
profit of $100.

3. If the owner of a call option with a strike price of $35 finds the stock to be trading
for $42 at expiration, then the option:

A. Expires worthless
B. Will not be exercised
C. Is worth $7 per share

4. What is the option buyer's total profit or loss per share if a call option is
purchased for a $5 premium, has a $50 exercise price, and the stock is valued at $53
at expiration?

5. Which combination of positions will tend to protect the owner from downside
risk?

A. Buy the stock and buy a call option


B. Sell the stock and buy a call option
C. Buy the stock and buy a put option
6. Which of the following statements is true?
A. For both calls and puts an increase in the exercise price will cause an increase in
the option price
B. For both calls and puts an increase in the time to maturity will cause an increase
in the option price
C. For calls, but not for puts, an increase in the time to maturity will cause an
increase in the option price

An Open Question for Discussion:

Should I buy this endowment insurance (commonly known as saving plan)?

I have to pay S$8,000 in the beginning of each year for 6 years. Then, I will receive a
lump-sum payment at the end of the 12th year. The amount of the payment is
conditional on the performance of the Participating Fund:

If the average rate of return of the Participating Fund is 3.1%, I will receive
S$54,546 in 12 years.

If the average rate of return of the Participating Fund is 4.6%, I will receive
S$61,587 in 12 years.

No matter how bad the rate of return of the Participating Fund is, the
guaranteed amount is S$41,434.

Note: Policy illustration

You might also like