Casestudy

Assignment 1 (Deadline 8.12.2013)

Part A assignment consists of 20 questions (5 questions per lecture 1-4). Though all 20 questions are supposed to be submitted together at the end of week 49, I recommend that you start working on the questions after the connected lectures. Part B is a mini case. The answers to the case are supposed to be submitted at the 8.12.2013 as well. Week 49 is off, giving you some time to work on the case. Please see further instructions below. Please submit all files through the course webpage. In case you have several files, you can either try to merge them, zip them into one file, or different group members submit different files.

Part A – Short questions

1.

Your computer manufacturing firm must purchase 10,000 keyboards from a supplier. One supplier demands a payment of $100,000 today plus $10 per keyboard payable in one year. Another supplier will charge $21 per keyboard, also payable in one year. The risk-free interest rate is 6%. a. b. What is the difference in their offers in terms of dollars today? Which offer should your firm take? Suppose your firm does not want to spend cash today. How can it take the first offer and not spend $100,000 of its own cash today?

2.

Consider two securities that pay risk-free cash flows over the next two years and that have the current market prices shown here:

a. b. c.

What is the no-arbitrage price of a security that pays cash flows of $100 in one year and $100 in two years? What is the no-arbitrage price of a security that pays cash flows of $100 in one year and $500 in two years? Suppose a security with cash flows of $50 in one year and $100 in two years is trading for a price of $130. What arbitrage opportunity is available?

3.

Your grandfather put some money in an account for you on the day you were born. You are now 18 years old and are allowed to withdraw the money for the first time. The account currently has $3996 in it and pays an 8% interest rate. a. b. c. How...