ISBN: Front endsheets Author: Bodie/Kane/Marcus Color: 4c Title: Investments, 9e Pages: 2,3 Want an online, searchable version of your. Investments Solution Manual Bodie Kane Marcus Mohanty. Course: BSc(Hons) FInancial Analysis (BFA). Chapter 01 – The Investment Envir. 14 15 16 24 25 the investment environment asset classes and financial instruments how securities are traded 10 mutual funds and other investment.
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Chapter 19 – Financial Statement Analysis Asset turnover measures the ability of a company to minimize the level of assets current or fixed to support its level of sales. The asset turnover increased substantially over the period, thus contributing to an increase in the ROE. Financial leverage measures the amount of financing other than equity, including short and long-term kanee. Financial leverage declined over the period, thus adversely affecting the ROE.
Since asset turnover rose substantially more than financial leverage declined, the net effect was an increase in ROE.
Chapter marus – Options Markets: Options provide numerous opportunities to modify the risk profile of a portfolio. The leverage provided by options makes this strategy very risky, and potentially very profitable. An example of a risk-reducing options strategy is a protective put strategy.
Here, the investor buys a put on an existing stock or portfolio, with exercise price of the put near or somewhat less than the market value of the underlying asset. This strategy protects the value of the portfolio because the minimum value of the stock-plus-put strategy is the exercise price of the put.
Investments, 10E by Bodie Kane Marcus | Suho Yoo –
Buying a put option on an existing portfolio provides portfolio insurance, which is protection against a decline in the value of the portfolio.
In the event of a decline in value, the minimum value of the put-plus-stock strategy is the exercise price of the put. As with any insurance purchased to protect the value of an asset, the tradeoff an investor faces is the cost of the put versus the protection against a decline in value.
The cost of the protection is the cost of acquiring the protective put, which reduces the profit that results should the portfolio increase in value. An investor who writes a call on an existing portfolio takes a covered call position. If, at expiration, the value of the portfolio exceeds the exercise price of the call, the writer of the covered call can expect the call to be exercised, so that the writer of the call must sell the portfolio at the exercise price.
Alternatively, if the value bosie the portfolio is less than the exercise price, the writer of the call keeps both the portfolio and the premium paid by the buyer of the call. The tradeoff for the writer of the covered call is the premium income received versus forfeit of any possible capital appreciation above the exercise price of the call.
An option is out of the money when exercise of the option kanee be unprofitable.
A call option is out of the money when the market price of the underlying stock is less than the exercise price of the option. If the stock price is substantially less than the exercise price, then the likelihood that the option will be exercised is low, and fluctuations in the market price investmment the stock have relatively little impact on the value of the option. For options that are far out of the money, delta is close to zero. Consequently, knae is generally little to be gained or lost by buying or writing a call that is far out of the money.
A similar result applies to a put option that is far out of the money, with stock price substantially greater than exercise price. A call is in the money when the market price of the stock is greater than the exercise price of the option.
If stock price is substantially greater than exercise price, then the price of the option approaches the order of magnitude of the price of the stock.
Under these circumstances, the buyer of an option loses the benefit of the leverage provided by options that are near the money. Consequently, there is little interest in options that are far in to the money.
Purchase a straddle, i. The total cost of the straddle is: Accounting for time value, the stock price would have to move in either direction by: Sell a straddle, i. This is your maximum possible profit since, at any other stock price, you will have to pay off on either the call or the put. Buy the call, sell write the put, lend: The cost of establishing the stock-plus-put portfolio is: We are ignoring here any interest earned over this short period of time on the premium income received from writing the option.
The payoff structure is: That minimum value is: The net cost of the collar is zero. The value of the portfolio will be as follows: Strategy a should be ruled out since it leaves Jones exposed to therisk of substantial loss of principal. Our ranking would be: The Excel spreadsheet for both parts a and b is shown on the next page, and the profit diagrams are on the following page.
The farmer has the option to sell the crop to the government for a guaranteed minimum price if the market price is too low. If the support price is denoted PS and the market invest,ent Pm then the farmer has a put option to sell the crop the invedtment at an exercise price of PS even if the price of the underlying asset Pm is less than PS.
The bondholders have, in effect, made a loan which requires repayment of B dollars, where B is the face value of bonds. If, however, the value of the firm V is less than B, the loan is kanr by the bondholders taking over the firm.
It is as though the boodie wrote a put on an asset worth V with exercise price B. Alternatively, one might view the bondholders as giving the right to the equity holders to reclaim the firm by paying off the B dollar debt. The bondholders have issued a call to the equity holders. The manager receives a bonus if the stock price exceeds a certain value and receives nothing otherwise. This is the same as the payoff to a call option.
Introduction Spreadsheet for Problem Proceeds from bodis options: For the put, this requires that: The investor bodiie betting that IBM stock bldie will have low volatility. This position is similar to a straddle. The put with the higher exercise magcus must cost more. Therefore, the net outlay to establish the portfolio is positive.
Since the options have the same price, your net outlay is zero. Your proceeds at expiration may be positive, but cannot be negative. The put you buy has a higher exercise price than the put you write, and therefore must cost more than the put that you write.
Therefore, net profits will be less than the payoff at time T. The value of this portfolio generally decreases with the stock price. Therefore, its beta is negative.
Sally does better when the stock price is high, but worse when the stock price is low. Profits are more sensitive to the value of the stock index. See graph below This strategy is a bear spread. The investor must be bearish: The bills plus call strategy has a greater payoff for some values of S T and never a lower payoff.
Since its payoffs are always at least as attractive and sometimes greater, bkdie must be more costly to purchase. The initial cost of the stock plus put position is: The stock and put strategy is riskier. This strategy performs worse when the market is down and better when the market is up. Therefore, its beta is higher. Parity is not violated because these options have different exercise prices.
,arcus applies only to puts and calls with the same exercise price and expiration date. Donie should choose the long strangle strategy.
A long strangle option strategy consists of buying a put and a call with the same expiration date and the same underlying asset, but different exercise prices. In a strangle strategy, the call has an exercise price above the stock price and the put has an exercise price below the stock price.
An investor who buys goes long a strangle expects that the price of the underlying asset TRT Materials in this boxie will either move substantially below the exercise price mwrcus the put or above the exercise price on the call.
This strategy would enable Donie’s client to profit from a large move in the stock price, either up or down, in reaction to the expected court decision. The maximum possible gain is unlimited if the stock price moves outside the breakeven range of prices.
Unlike traditional debt securities that pay a scheduled rate of coupon interest on a periodic basis and the par amount of principal at maturity, the equity index-linked note typically pays little or no coupon interest; at maturity, however, a unit holder receives the original issue price plus a supplemental redemption amount, the value of which depends on where the equity index settled relative to a predetermined initial level. In exchange for a lower than market coupon, buyers of a bear tranche receive a redemption value that exceeds the purchase price if the commodity price has declined by the maturity date.
Conversion value of a convertible bond is the value of the security if it is converted immediately. Market conversion price is the price that an investor effectively pays for the common stock if the convertible bond is purchased: The current market conversion price is computed as follows: The expected one-year return for the Ytel convertible bond is: The expected one-year return for the Ytel common equity is: The increase in equity price does not affect the straight bond value component of the Ytel convertible.
In response to the increase in interest rates, the straight bond value should decrease and the option value should increase. The increase in interest rates decreases the straight bond value component bond values decline as interest rates increase of the convertible bond and increases the value of the equity call option component call option values increase as interest rates increase.
This increase may be small or even unnoticeable when compared to the change in the option value resulting from the increase in the equity price. The value of a put option also increases with the volatility of the stock. We see this from the put-call parity theorem as follows: Holding firm-specific risk constant, higher beta implies higher total stock volatility.