Question;PROBLEM 8: Mutual funds van effectively charge sales fees in one;of three ways: front-end load fees, 12b-1 (i.e., annual) fees, or deferred;(i.e., back-end) load fees. Assume that the SAS fund offers its investors the;choice of the following sakes fee arrangements: (1) a 3 percent front-end load;(2) a 0.50 percent annual deduction or (3) a 2 percent back-end load, paid at;the liquidation of the investor?s position. Also assume that SAS fund averages;NAV growth of 12 percent per year.;(a) If you start with $ 100,000 in investment capital, calculate;what an investment in SAS would be worth in three years under each of the;proposed sales fee schemes. Which scheme would[CT1] [CT2] you choose?;(b) Explain the relationship between the timing of the sales;charge and your investment horizon. In general, if you intend to hold your;position for a long time, which fee arrangement would you prefer?;15:42;(c) Explain the relationship between the timing of the sales;charges and your investment horizon, I you hold you position in a long time;which fee arrangement you prefer?;Problem;24-3Consider the recent performance of the Closed Fund, a closed-end fund;devoted to finding undervalued, thinly traded stocks;Period;NAV;Premium/Discount;0;$10.00;0.0%;1;$11.25;-5.0%;2;$9.85;2.3%;3;$10.50;-3.2%;4;$12.30;-7.0%;Here, price premiums and discounts are indicated by pluses and;minuses, respectively, and Period 0 represents Closed Fund?s initiation date.;a. Calculate the average return per period for an investor who;bought 100 shares of the Closed Fund at the initiation and then sold her;position at the end of Period 4.;b. What was the average periodic growth rate in NAV over that same;period?;c. Calculate the periodic return for another investor who bought;100 shares of Closed Fund at the end of Period 1 and sold his position at the;end of Period 2.;d. What was the periodic growth rate in NAV between Periods 1 and;2?;5.;Consider the following questions on the pricing of options on;the stock of ARB Inc.;a- A share of ARB stock sells for $75 and has a;standard deviation of returns equal to 20% per year. The current risk-free rate;is 9% and the stock pays two dividends: (1) a 2% dividend just prior to the;option?s expiration day, which is 91 days from now (i.e., exactly one half;year). Calculate the black-Scholes value for European-style call option with an;exercise price of $70.;b- What would be the price of a 91-day;European-style option on ARB stock having the same exercise price?;c- Calculate the change in the call option?s value;that would occur if ARB?s management suddenly decided to suspend dividend;payments and this action had no effect on the price of the company?s stock.;d- Briefly describe (without calculations) how;your answer in part a would differ under the following separate circumstances;(1) the volatility of ARB stock increases to 30%, and (2) the risk free rate;decreases to 8%.;7- Suppose the;current value of a popular stock index is 653.50 and the dividend yield on the;index is 2.8%. Also, the yield curve is flat at a continuously compounded rate;of 5.5%.;a. If you;estimate the volatility factor for the index to be 16%, calculate the value of;an index call option with an exercise price of 670 and an expiration date in;exactly three months.;b. If the;actual market price of this option is $17.40, calculate its implied volatility;coefficient.;c. Besides;volatility estimation error, explain why your valuation and the option?s traded;price might differ from one another.;10- Melissa Simmons is the chief investment officer of a;hedge fund specializing in options trading. She is currently back testing;various option trading strategies that will allow her to profitfrom large;fluctuations-either up or down-in a stock?s price. An example of such typical;trading strategy is straddle strategy that involves the combination of a long;call and a long put with an identical strike price and time to maturity. She is;considering the following pricing information on securities associated with;friendwork, a new internet start-up hosting a leading online social network;Friendwork stock: $100;Call option with an exercise price of $100 expiring in one;year: $9;Put option with an exercise price of $100 expiring in one;year: $8;a. Use the;above information on friendwork and draw a diagram showing the net profit/loss;position at maturity for the straddle strategy. Clearly label on the graph the;break-even points of the position.;b. Melissa?s colleague proposes another lower-cost option;strategy that would profit from a large fluctuation in friendwork?s stock;price;Long call option with an exercise price of $110 expiring in;one year: $6;Long put option with an exercise price of $90 expiring in;one year: $5;Similar to part a, draw a diagram showing the net;profit/loss position for the above alternative option strategy. Clearly label;on the graph the breakeven points of the position.
Paper#47739 | Written in 18-Jul-2015Price : $67