Chapter7PropertiesofStockOptionPrices(期权期

国际会计第七版英文版课后答案（第七章）预览说明:预览图片所展示的格式为文档的源格式展示,下载源文件没有水印,内容可编辑和复制Chapter 7Financial Reporting and Changing PricesDiscussion Questions Solutions1.Historical-based financial statements may be misleading during periods of significant inflation.Many resources may have been acquired in periods when the purchasing power of the monetary unit was much higher. These expenses then typically are deducted from revenues that reflect current purchasing power. The resulting income number is unintelligible. Another problem for statement readers is that the value of assets recorded at their historical acquisition cost is typically understated as a result of inflation. Understated asset values produce understated expenses and overstated earnings.Financial trends are also difficult to interpret, as trend statistics generally include monetary units of different purchasing power. A positive trend in sales may be due to price changes, not real increases in sales.2. A price index is a cost ratio, that is, the ratio of a representative “basket” of goods and servicesconsumed by an average family, compared to the price of that same basket in a benchmark (“base”) year. The price index is invaluable in enabling a statement reader to translate sums of money paid in the past to their current purchasing power equivalents.3.This statement is partly true and shows the confusion thatsurrounds inflation accounting. Inaccounting for changing prices, users must distinguish between general price changes and specific price changes. General prices refer to the prices of all goods and services in the economy. The object of accounting for general price level changes is to preserve the general purchasing power of a company’s money capital. Specific price changes refer to changes in the prices of specific commodities. The object of accounting for specific price changes is to preserve a company’s productive capacity or operating capability.4.The congressman is wrong. The object of inflation accounting is to clarify the distinction betweencapital and income, not to minimize corporate taxes. Inflation accounting shows how much money the company can pay in expenses, taxes, and dividends, while keeping enough resources to maintain its capital.5.Although it is generally conceded in principle that price level-adjusted financial statements are moreuseful than conventional accounting statements during periods of significant inflation, it is a judgment call to identify exactly when price level-adjusted statements become more meaningful. Asa rule of thumb, executives in Brazil use an inflation rate greater than 10 % per month. Investors inGermany or Switzerland may believe that 5 % inflation per year is alarming. Unfortunately, no one has yet developed a formal, rigorous, easy-to-apply definition of meaningfulness.How does one determine whether the benefits of price level-adjusted accounting information exceed the costs? While the costs to generate such information can be measured, it is muchharder to quantify the benefits. Financial accounting deals with information produced by business enterprises for use by external decision makers. Consequently, measurement of the benefits of price level-adjusted information must cover all user groups in an economy. Multiple user groups, uneven distributions of benefits (both within and between groups), and favorable economy-wide spillover effects of price level information complicate the task. Adding international dimensions makes the problem even worse.6.The U.S. approach resembles the price-level adjusted current cost model, whereas the U.K.approach embraces the current cost model. While both require disclosure of the impact ofchanging prices on monetary items, the U.S. approach basically uses the general price level index to compute monetary gains and losses, whereas the U.K. employs specific prices changes by way of its gearing adjustment.1.The International Accounting Standards Board sanctions use of the general price level model orthe current cost framework. Whichever method is employed, these inflation adjustments must be expressed in terms of constant purchasing power as of the balance sheet date. Purchasing powergains or losses are to be included in current income. Firms adjusting their accounts for changingprices must disclose, at a minimum: a) the fact that end-of-period purchasing power adjustmentshave been made, b) the asset valuation framework employed in the primary financial statements,c) the type of inflation index or indexes employed and theirlevel at the end of the period as wellas their movements during the period, and d) the net purchasing power gain or loss on netmonetary items held during the period. Given the options that are available, analysts mustunderstand the differences between the approved inflation accounting methods to be able tocompare companies choosing one option over the other and to assure proper interpretation ofinflation adjusted amounts.2.The historical cost-constant dollar model measures the impact of general price level changes on afirm's reported performance and financial position. The current cost model examines the impact of specific price changes on enterprise income and wealth.The two measurement frameworks are similar in that both attempt to clarify the distinction between capital and income. They differ in reporting objectives. Whereas the historical cost/constant dollar model attempts to preserve the general purchasing power of a firm's original money capital, the current cost model attempts to preserve an entity's physical capital or productive capacity.3.Your authors think that restating foreign and domestic accounts to their current cost equivalentsproduces information that is far more helpful to investor decisions than historical cost methods, whether or not adjusted for changes in general price levels. Such information provides a performance measure that signals the maximum amount of resources that enterprises can distribute without reducing their productive capacity. It also facilitates comparisons ofconsolidated data.10. The gearing adjustment is an inflation adjustment that partially offsets the additional charges toincome associated with assets whose values are restated for inflation (e.g., higher depreciation and cost of sales). This adjustment recognizes that borrowers generally gain from inflation because they can repay their debts with currency of reduced purchasing power. Hence, it is unnecessary to recognize the higher replacement cost of inventory and plant and equipment in the income statement so far as they are financed by debt.11. Accounting for foreign inflation differs from accounting for domestic inflation in two major ways.First, foreign rates of inflation often are higher than domestic rates, which increases potential distortions in an entity's reported results from changing prices. Second, as foreign exchange rates and differential national rates of inflation are seldom perfectly negatively correlated, care must be taken to avoid double-dipping when consolidating the results of foreign operations.12.Double-dipping refers to methods that count the effects of foreign inflation twice in reportedearnings. Earnings are reduced once when cost of sales is adjusted upwards for inflation, andagain when inventories are translated to domestic currency using a current exchange rate, whichyields a translation loss. Since the change in the exchange rate itself was caused by inflation, the result is a double charge for inflation.Exercise Solutions1.This exercise is a good way to test students’ understanding of the various approaches toaccounting for changin g prices. Vestel’s earnings numbers are based on the general price levelmodel whereas Infosys is measuring its performance based on a current cost framework. Modello goes a step further and adjusts its current cost statements for changes in the general price level.Some may feel that current cost data, which is based on the notion of replacement costs, is toosubjective a notion to be reliable. Since general price level data are based on general price level indices, the numbers appearing in Vestel’s income statement are much more objective andfacilitates comparisons among companies using a similar methodology. Moreover, Vestel’sstatements do not violate the historical cost doctrine. Others will argue that the value of stockinvestments are based on discounted future cash flows. Accordingly, the current cost framework provided by Infosys is more germane to investor decisions as it measures the amount of earnings that could be distributed as dividends without reducing the firm’s future dividend gen eratingpotential. Moreover, current cost earnings, including the gearing adjustment , reflects how thefirm is impacted by prices that are more germane to the firm, as opposed to the general public.Some will argue that Modello’s income statement combin es the best of both worlds. However,there is merit to the argument that the income statementshould measure the performance of thefirm and that this is best accomplished with the current cost framework. Since individualinvestors are affected by the g eneral price level, they should adjust their share of a firm’s current cost earnings distributions for general inflation.2. a.Income Statement Historical Price Level Historical Cost-Cost Adjustment Constant Dollar Revenue MXP 144,000,000 420/340 MXP 177,882,353 Operating expenses (86,400,000) 420/340 (106,729,412) Depreciation (36,000,000) 420/263 (57,490,494)Operating income MXP 21,600,000 MXP 13,662,447a Monetary gains(losses) - (73,248,759)Net income MXP 53,280,000 MXP(59,586,312)Balance SheetCash MX(P 157,600,000 420/420 MXP 157,600,000Land 180,000,000 420/263 287,452,471Building 720,000,000 420/263 1,149,809,885Acc. Depreciation (36,000,000) 420/263 (57,490,494)Total MXP 1,021,600,000 MXP 1,537,371,862Owners' equity(beg.) MXP1,000,000,000 rolled forward b MXP 1,596,958,174Net income (loss) 21,600,000 (59,586,312)Owner's equity MXP 1,021,600,000 MXP 1,537,371,862(end)a Monetary loss:CashBeginning balance 1,000,000,000 420/263 1,596,958,174 Purchase ofreal estate ( 900,000,000) 420/263 (1,437,262,356)Rental revenues 144,000,000 420/340 177,882,353Operating expenses (86,400,000) 420/340 106,729,412)157,600,000 230,848,759-157,600,000 Monetary loss (73,248,759)b Beginning equity x price level adjustment = adjusted amount= P 1,000,000,000 x 420/263 = P 1,596,958,1742.b.Cost HC/Constant DollarReturn on Assets 21,600,000 (59,586,312)1,021,600,000 1,537,371,862= 2.1% = -3.9%Cost-based profitability ratios tend to provide a distorted (overstated) picture of a company's operating performance during a period of inflation.3.20X7 20X8Cash MJR 2,500 MJR 5,100Current liabilities (1,000) (1,200)LT-Debt (3,000) (4,000)Net monetary liabilities MJR (1,500) MJR (100)Zonolia Enterprise’s net monetary liability position changed by MJR1,400 during the year (MJR100) –(MJR1,500).4.Nominal Restate for ConstantMJR’s Majikstan GPL MJR’sNet monetary liab.'s MJR 1,500 x 32,900/30,000 = MJR1,645 12/31/X7Decrease during year (1,400) = (1,400)Net monetary liab.'s MJR 100 x 32,900/36,000 = MJR 9112/31/X8Monetary (general purchasing power) gain MJR 1545. Historical Current Cost Current Income Statement Cost Adjustment Cost Revenues MXP 144,000,000 - MXP 144,000,000 Operating expenses 86,400,000 - 86,400,000 Depreciation (36,000.000) 1.8 64,800,000 Net Income (loss) MXP 21,600,000 MXP (7,200,000)Balance SheetCash MXP 157,600,000 - P 157,600,000 Land 180,000,000 1.9 342,000,000 Building 720,000,000 1.8 1,296,000,000 Acc. Depreciation (36,000,000) 1.8 (64,800,000) Total MXP1,021,600,000 MXP 1,730,800,000 Owners' Equity Beg. Balance MXP1,000,000,000 MXP 1,000,000,000 OE revaluation a - 738,000,000Net income (loss) 21,600,000 (7,200,000) Total MXP1,021,600,000 MXP 1,730,800,000a Revaluation of land MXP 162,000,000Revaluation of building 576,000,000MXP 738,000,0006. Solution in 000,000's:MJR8,000 X 137.5/100.0 = MJR11,00020X7 20X8Current cost MJR8,000 MJR11,000Acc. depreciation (1,600) (3,300)aNet current cost MJR6,400 MJR7,700a Current cost depreciation = MJR800 X 137.5/100.0 = 1,100per year for 3 years.7. As no new assets were acquired during the year, we must determine to what extent the MJR3,000 increase in the current cost of Zonolia's equipment exceeded the change in the general price level during the year. The appropriate calculation follows: MJR11,000 - [MJR8,000 X 36,000/30,000]= MJR11,000 - MJR9,600= MJR1,400Alternatively, if we follow the FASB’s sug gested methodology, where calculations are expressed in average (20X8) dollars, current cost depreciation would be computed by reference to the average current cost of the related assets. Thus, Current cost, 12/31/X7 MJR8,000,000Current cost, 12/31/X8 11,000,000MJR19,000,000Average current cost MJR19,000,000/2 = MJR9,500,000Current cost depreciation at 10% = MJR950,000Increase in current cost of equipment, net of inflation (000's): Current Restate for Current cost/Cost Inflation Constant Zonos Current cost, net12/31/X7 MJR6,400 X 32,900/30,000 MJR7,019Depreciation (950) (950)Current cost, net12/31/X8 7,700 X 32,900/36,000 7,037MJR 2,250 MJR968The increase in the current cost of equipment, net of inflation is MJR968. The difference between the nominal renge amount (MJR2,250) and constant renges (MJR968) is the inflation component of the equipment's current cost increase.8. Restate-translate method:Constant Translate $ Equivalentsrenges of constantrengesIncrease in currentcost of equip., netof inflation MJR968,000 X 1/4,800 = $202Translate-restate method:CC (MJR) Translate CC ($) Restate CC/ Constant $U.S. GPLCC, net MJR 6,400,000 x 1/4,800 = $1,333 x 292.5/281.5 = $1,38512/31/X7Dep. (950,000) x 1/4,800 = (198) = (198)CC, net 7,700,000 x 1/4,800 = 1,604 x 292.5/303.5 = 1,54612/31/X8MJR 2,250,000 $ 469 $ 3599.20X7 20X8￡m ￡mTrade receivables 242 270-Trade payables (170) (160)Net monetary working capital 72 110Change in monetary working capital = ￡38 (￡110 - ￡72) Nominal Restate for Constant￡British PPI ￡Net monetary W/C 72 X 110/100 = 79.212/31/20X7Increase during year 38 = 38.0Net monetary W/C 110 X 110/120 = 100.812/31/20X8Monetary working capital adjustment = (16.4)aa This amount is added to the current cost adjustments for depreciation and cost of sales because trade receivables exceeded trade payables, thus tying up working capital in an asset that lost purchasing power.Gearing adjustment:[(TL – CA)/(FA + I + MWC)] [CC Dep. Adj. + CC Sales Adj. + MWCA]where TL = total liabilities other than trade payablesCA = current assets other than trade receivables and inventoryFA = fixed assets including investmentsI = inventoryMWC = monetary working capitalCC Dep. Adj. = current cost depreciation adjustmentCC Sales adj. = current cost of sales adjustmentMWCA = monetary working capital adjustment= [(128 – 75)/(479 + 220 + 110] [￡m 216]= [.066 ] [216]= ￡14.3The only number I could readily identify in problem 9 is inventory of 220. The next number I could come close on is fixed assets. Looks like the solution above says 479, the text for 08 indicates 473. I could not see where the 110 (MWC) came from. Neither is it clear where the other 3 items in brackets came from. The solution needs to be clearer before I can check the numbers.This gearing adjustment of ￡14.3 million is subtracted from the current cost of sales and depreciation adjustments. It represents the purchasing power gain from using debt to finance part of the firm's operating assets.a.Nominal Thai Historical Translation U.S.baht inflation c ost/constant rate dollaradjustment baht equivalentInven-tory BHT500,000 x 100/200 = BHT250,000 x .02 = $5,000b.Nominal Translation U.S. U.S. Historicalbaht rate dollar inflation c ost/constantequivalent adjustment dollarsInven-tory BHT500,000 x .02 = 10,000 x 180/198 = $9,090Sorry this seems confusing compared to number 2 where the year end index was in the numerator and either the beginning or average index was in the denominator (e.g. 420/340 or 420/263). It is not clear why we do the opposite here where the Thai price level doubles and we put the 200 in the denominator and 100 in the numerator.c. Most students will prefer the restate-translate method. This approach has merit if general and specific pricelevels move in tandem. If not, neither approach is satisfactory as both are based on a historical cost valuation framework that is generally irrelevant for investment decisions.d. For reasons enumerated in this chapter, we favor restating local currency assets for specific price changesand then translating these current cost equivalents to dollars using the current exchange rate.11. We assume that Doosan Enterprises translates its inventory at the current rate and adjusts its cost ofsales for inflation by simulating what it would have been ona LIFO basis. Two adjustments are necessarybecause local inflation impacts exchange rates used to translate foreign currency inventory balances to dollars.With FIFO inventories, a translation loss is recorded in "as reported" earnings when it is originally translatedto U.S. dollars by a current exchange rate that changed (devalued) during the period. This translation loss isan indirect charge for local inflation. The inflation adjustment (simulated LIFO charge) to increase "as reported" cost of sales to a current cost basis is an additional charge for inflation. Absent some offsettingentry, consolidated results would be charged twice for inflation. To avoid this double charge, the translation loss embodied in reported earnings is deducted from the simulated LIFO charge to arrive at a net U.S. dollarcurrent cost of sales adjustment. Steps in the adjustment process are as follows:1. FIFO inventory subject to simulated LIFO charge KRW10,920,0002. Restate line 1 to January 1 currency units(KRW10,920,000 x 100/120). The result is anapproximation of December 31 LIFO inventory KRW9,100,0003. Difference between FIFO and LIFO inventorybalances (line 1 minus line 2) is the additionallira LIFO expense (current cost adjustment)for the current year. KRW1,820,0004. Translate line 3 to dollars at the January 1exchange rate (KRW1,820,000 ÷ 900). The resultis the additional dollar LIFO expense for thecurrent year $ 2,0225. Calculate the translation loss on FIFO inventory(line 1) that has already been reflected in "asreported" results:a. Translate line 1 at Januaryexchange rate (KRW10,920,000 ÷ KRW900) $ 12,133b. Translate line 1 at December 31exchange rate (L 10,920,000 ÷ KRW1,170) $ 9,333c. The difference is the translationloss in “as reported” results $ (2,800)6. The difference between lines 4 and 5c isthe cost of sales adjustment in dollars:a. Additional dollar LIFO expense fromline 4. $ 2,022b. Less: Inventory translation loss alreadyreflected in "as reported” results (fromline 5c) $ (2,800)c. The difference is the net dollar currentcost of sales adjustment $ (778)Here, the current cost of sales adjustment is negative (i.e., reduces the dollar cost of sales adjustment). This is because the won devalued by more than the differential inflation rate (assuming a U.S. inflation rate close to zero). If the lira devalued by less than the differential inflation rate, the cost of sales adjustment would have been positive.12.1. Cost of fixed assets at 12/31 EUR20,0002. FIFO inventory at 12/31 EUR 8,0003. Total EUR28,0004. Less: Owners' equity at 12/31 EUR 2,0005. Liabilities used to financefixed assets and inventory EUR26,0006. Restate liabilities to beginningof period markka (EUR26,000 X300/390) EUR20,0007. Purchasing power gain EUR 6,0008. Purchasing power gain inpounds (EUR 6,000/EUR 1.5) ￡4,0009. Translation gain on appliedliabilities(EUR 26,000/EUR 1.5 -EUR26,000/EUR1.95) ￡4,00010. Net purchasing power gain ￡ -0-In this case the translation gain on liabilities used to finance nonmonetary assets equals the purchasing power gain because the currency devaluation matched the differential inflation of 30%. Hence, no purchasing power gains would be recognized.Case 7-1 SolutionCase 7.1 Kashmir Enterprises1.a–cHistorical Price Level HistoricalCost Adjustment Cost ConstantIncome Statement RupeesRevenues INR6,000,000 160/144 I NR6,666,667Cost of Sales 2,560,000 160/128 3,200,000Selling & Admin. 1,200,000 160/144 1,333,333Depreciation 160,000 160/128 200,000Interest 240,000 160/160 240,000Monetary gains (losses)a - 741,666Net Income INR1,840,000 INR2,435,000Balance SheetCash INR2,480,000 160/160 I NR2,480,000 Inventory 480,000 160/128 600,000Building 3,200,000 160/128 4,000,000Accu. depreciation (160,000) 160/128 (200,000) Total INR6,000,000 INR6,880,000Accounts payable INR 620,000 160/160 I NR 620,000 Notes payable 2,400,000 160/160 2,400,000 Owners' equity 2,980,000 3,860,000INR 6,000,000 INR6,880,000a Monetary gains/(losses):CashBeg. balance INR 720,000 160/128 INR1,150,000 Down payment (800,000) 160/128 (1,000,000) Sales 6,000,000 160/144 6,666,667Selling & Adm. exp. (1,200,000) 160/144 (1,333,333) Payment on account (2,200,000) 160/144 (2,444,444) Interest (240,000) 160/160 (240,000)INR 2,480,000 INR2,798,890-2,480,000Monetary loss INR (318,890)a Monetary gains and losses:Accounts PayableBeg. balance INR 420,000 160/128 INR525,000 Purchases 2,400,000 160/128 3,000,000Payments on account (2,200,000) 160/144 (2,444,444) INR 620,000 INR1,080,556- 620,000Monetary gain INR 460,556a Monetary gains/(losses):Notes PayablePurchase warehouse INR 2,400,000 160/128 INR 3,000,000 - 2,400,000Monetary gain INR 600,000Net monetary loss: INR(318,890) + INR460,556 + INR600,000 = INR741,666.Current Cost Financial StatementsHistorical Adjustment Current Cost Income Statement Cost F actor EquivalentsRevenues INR6,000,000 - INR 6,000,000Cost of Sales 2,560,000 1.3 3,328,000Selling and adm. 1,200,000 - 1,200,000Depreciation 160,000 1.4 224,000Interest 240,000 - 240,000Net Income INR 1,840,000 INR1,008,000Balance SheetCash INR 2,480,000 - INR 2,480,000Inventory 480,000 1.3 624,000Building 3,200,000 1.4 4,480,000Acc. depreciation 160,000 1.4 224,000Total INR 6,000,000 INR 7,360,000Accounts payable INR 620,000 - INR 620,000Notes payable 2,400,000 - 2,400,000Owners' equity 2,980,000 4,340,000INR 6,000,000 INR 7,360,0002. Your authors favor current cost over historical or historical cost/constant dollar financial statements. Finance theory states that investors are interested in a firm's dividend-generating potential, as the value of their investment depends on future cash flows. A firm's dividend-generating potential, in turn, is directly related to its productive capacity. Unless a firm preserves itsproductive capacity or physical capital(e.g.,plant, equipment, inventories), dividends can’t be sustained over time. Under these circumstances, current cost financial statements give investors information important to their decisions. They show the maximum resources that a firm can distribute to investors without impairing its operating capability.3.Translate-Restate MethodBalance Sheet, Jan. 1Local Currency Trans. Dollar Inflation Historical costRate Equivalents Adjustment Constant $Cash INR 920,000 .025 $23,000 - $23,000Inventory 640,000 .025 16,000 - 16,000 Total INR1,560,000 $39,000 $39,000A/P INR 420,000 .025 $10,500 - $10,500 Owners' equity 1,140,000 .025 28,500 - 28,500 Total INR 1,560,000 $39,000 $ 39,000Income StatementDec. 31Revenues INR 6,000,000 .022 $ 132,000 108/104 $ 137,077 Cost of sales 2,560,000 .022 56,320 108/100 60,825Selling & Adm. 1,200,000 .022 26,400 108/104 27,415 Depreciation 160,000 .022 3,520 108/100 3,802 Interest 240,000 .022 5,280 108/108 5,280Net Income INR 1,840,000 $ 40,480 $ 39,755 Monetary gains (losses)a - - 4,468$44,223a Monetary gains/(losses):CashBeg. Bal INR 920,000 .02 $ 18,400 108/100 $ 19,872Downpayment (800,000) .02 (16,000) 108/100 (17,280) Sales 6,000,000 .02 120,000 108/104 124,615Selling & Adm. (1,200,000) .02 (24,000) 108/104 (24,923)Payments on Acc. (2,200,000) .02 (44,000) 108/104 (45,692) Interest (240,000) .02 (4,800) 108/108 (4,800)INR 2,480,000 $ 49,600 51,792-49,600Monetary loss $ (2,192) Accounts PayableBeg. Bal. INR 420,000 .02 $ 8,400 108/100 $ 9,072Purchases 2,400,000 .02 48,000 108/100 51,840Pmt. on acc. (2,200,000) .02 (44,000) 108/104 45,692INR 620,000 $ 12,400 $ 15,592- 12,400Monetary gain $ 2,820Notes payablePur. W/house Rpe 2,400,000 .02 $ 48,000 108/100 $ 51,840 48,000Monetary gain $ 3,840Netmonetary gain: $(2,192) + $2,820 + $3,840 = $4,468.Balance Sheet Local Trans. Dollar Inflation Historical cost- Dec. 31 Currency Rate Equiv. Adjustment Constant $Cash INR 2,480,000 .02 48,600 108/108 $ 48,600 Inventory 480,000 .02 9,600 108/100 10,368 Building 3,200,000 .02 64,000 108/100 69,120Acc. Dep. 160,000 .02 3,200 108/100 3,456Total INR 6,000,000 $120,000 $ 124,632Acc. payable 620,000 .02 12,400 108/108 $ 12,400Notes payable 2,400,000 .02 48,000 108/108 48,000Trans. adj.b - (9,380) (9,978)Owners' equity c 2,980,000 68,980 74,210Total INR 6,000,000 $120,000 $124,632________________________________________________________________ __b Translation adjustment:Beginning net assets Rpe 1,140,000 (.02 - .025) = $ (5,700) X 108/100 = $(6,156)Increase in net assets Rpe 1,840,000 (.02 - .022) = (3,680) X 108/104 = $(3,822)$(9,380) $(9,978) c Balancing residualRestate - Translate MethodBalance Sheet Local Inflation Historical Cost- Trans. D ollar Jan 1. Currency Adjustment Constant rupee Rate equivalents Cash INR 920,000 128/128 INR 920,000 .025 $ 23,000 Inventory d 640,000 128/128 640,000 .025 16,000Total INR1,560,000 INR1,560,000 $ 39,000Acct. payable INR 420,000 128/128 INR 420,000 .025 $ 10,500Owner's equity 1,140,000 1,140,000 28,500Total INR 1,560,000 INR 1,560,000 $ 39,000d Assumes inventory acquired near year-end.Income StatementYear ended Dec. 31Revenues INR 6,000,000 160/144 INR 6,666,666 .022 $ 146,667Cost of Sales 2,560,000 160/128 3,200,000 .022 70,400 Selling & Adm. 1,200,000 160/144 1,333,333 .022 29,333 Depreciation 160,000 160/128 200,000 .022 4,400Interest 240,000 160/160 240,000 .022 5,280Net Income INR1,840,000 INR1,693,334 $ 37,254 Monetary gains(losses)a- 741,666 .022 16,317INR2,435,000 $ 53,571Balance SheetDec. 31Cash INR 2,480,000 160/160 INR 2,480,000 .02 $ 49,600Inventory 480,000 160/128 600,000 .02 12,000Building 3,200,000 160/128 4,000,000 .02 80,000Acc. deprec. 160,000 160/128 200,000 .02 4,000Total INR 6,000,000 INR 6,880,000 $137,600Acc. payable INR620,000 160/160 INR 620,000 .02 $ 12,400 Notes payable 2,400,000 160/160 2,400,000 .02 48,000Owner's equity 2,980,000 3,860,000 87,770 Translation adj.b - (10,570)Total INR 6,000,000 INR 6,880,000 $137,600________________________________________b Beginning net assets INR1,140,000 (.02 - .025) = $ (5,700)Change in net assets 2,435,000 ).02 - .022) = $(4,870)$(10,570)Both methods are inadequate for American investors because they are based on the historical cost valuation framework. A better reporting procedure is to restate local accounts to their current cost equivalents, then translate these amounts to the reporting currency using the year-end (current) foreign exchange rate. This is illustrated here.Restate (current cost)/Translate (current rate)Cash INR 920,000 - INR 920,000 .025 $ 23,000Inventory 640,000 - 640,000 .025 16,000Total INR 1,560,000 INR1,560,000 $ 39,000Acc. payable INR 420,000 - INR 420,000 .025 $ 10,500Owner's equity 1,140,000 - 1,140,000 28,500。

债券及股票的定价策略(英文版)In finance, pricing strategies for bonds and stocks are crucial for investors and financial institutions to determine the fair value of these financial securities. This helps in making informed investment decisions and managing investment portfolios effectively. Let's explore the pricing strategies for bonds and stocks.Bond Pricing Strategy:1. Discounted Cash Flow (DCF) Analysis: This strategy involves calculating the present value of future cash flows generated by the bond. The cash flows include periodic interest payments and the bond's face value at maturity. The present value is determined by discounting these cash flows using an appropriate discount rate, usually the bond's yield to maturity (YTM).2. Comparable Bond Analysis: This strategy relies on comparing the bond in question with similar bonds in the market. By analyzing similar bonds' yields and prices, investors can assess whether the bond is overvalued or undervalued. Factors considered in this analysis include credit rating, coupon rate, maturity, and market conditions.3. Yield Spread Analysis: This strategy involves analyzing the yield spread between a particular bond and a benchmark bond with similar characteristics but different credit ratings. If the yield spread is wider than historical levels, indicating higher risk, the bond may be priced at a discount. Conversely, a narrower yield spread implies a premium.Stock Pricing Strategy:1. Dividend Discount Model (DDM): This strategy focuses on estimating the intrinsic value of a stock based on its future dividends. The DDM involves discounting expected future dividends to the present value using an appropriate discount rate, such as the stock's required rate of return or the dividend growth rate.2. Price-to-Earnings (P/E) Ratio Analysis: This strategy evaluates a stock's value by comparing its market price to its earnings per share (EPS). A low P/E ratio may suggest an undervalued stock, while a high P/E ratio could indicate an overvalued stock. This analysis considers industry P/E ratios, earnings growth prospects, and other relevant factors.3. Comparable Company Analysis: This strategy involves comparing the valuation metrics of a company with its industry peers or similar companies. Parameters such as price-to-sales ratio, price-to-book ratio, or enterprise value-to-EBITDA ratio are compared to identify relative valuation. If a company's valuation is significantly lower than its peers with similar fundamentals, it may be considered undervalued.Both bond and stock pricing strategies require careful analysis of various quantitative and qualitative factors. It is crucial for investors to consider the fundamental characteristics of the security, market conditions, economic indicators, interest rates, and other relevant factors. Additionally, incorporating risk assessment and future market expectations into these pricing strategies enhances their accuracy.Bond Pricing Strategy (Continued):4. Term Structure of Interest Rates Analysis: This strategy takes into account the term structure of interest rates, which shows the relationship between the yields and maturity dates of bonds. By comparing the yields of bonds with different maturities, investors can assess the expectations of future interest rate movements. If the current bond's yield is higher than the expected future rates, it may be undervalued, and vice versa.5. Credit Rating Analysis: Credit ratings assigned by rating agencies provide an indication of a bond's creditworthiness. Higher-rated bonds typically have lower yields due to lower perceived risk. Investors can analyze the bond's credit rating and compare it to similar rated bonds to determine whether the bond is priced appropriately.Stock Pricing Strategy (Continued):4. Discounted Free Cash Flow (DCF) Analysis: This strategy estimates the intrinsic value of a stock by forecasting its future cash flows. The future cash flows are projected based on expected revenue, expenses, and capital expenditures. These cash flows are discounted to their present value using an appropriate discount rate, such as the company's cost of capital. The resulting value represents the fair value of the stock.5. Price-to-Book (P/B) Ratio Analysis: This strategy compares a company's market price per share to its book value per share. The book value represents the net assets of the company, calculated by subtracting liabilities from assets. A low P/B ratio may indicate anundervalued stock, suggesting that the market is not fully recognizing the company's tangible assets.6. Earnings Growth Analysis: This strategy looks at the growth potential of a company's earnings. Investors analyze historical earnings growth rates and projected future growth rates to assess the stock's value. A higher expected earnings growth rate may justify a higher valuation for the stock.7. Technical Analysis: This pricing strategy focuses on analyzing historical price and volume patterns of a stock to predict future price movements. Technical analysts use various tools and techniques such as charts, moving averages, and oscillators to identify trends, support and resistance levels, and other patterns that can guide investment decisions.It is important to note that these pricing strategies serve as a guide and should not be considered definitive methods of valuation. Market conditions, investor sentiment, and unforeseen events can impact the fair value of bonds and stocks. It is recommended to use a combination of these strategies and exercise caution while interpreting the results. Regular monitoring and reassessment of pricing strategies are necessary to adapt to changing market dynamics. Ultimately, investors should conduct thorough research and seek professional advice before making investment decisions.。

CHAPTER 7 FUTURES AND OPTIONS ON FOREIGN EXCHANGESUGGESTED ANSWERS AND SOLUTIONS TO END-OF—CHAPTERQUESTIONS AND PROBLEMSQUESTIONS1。

Explain the basic differences between the operation of a currency forward market and a futures market.Answer: The forward market is an OTC market where the forward contract for purchase or sale of foreign currency is tailor-made between the client and its international bank. No money changes hands until the maturity date of the contract when delivery and receipt are typically made. A futures contract is an exchange-traded instrument with standardized features specifying contract size and delivery date。

Futures contracts are marked-to—market daily to reflect changes in the settlement price。

Delivery is seldom made in a futures market。

Rather a reversing trade is made to close out a long or short position。

投资学第7版TestBank答案21Multiple Choice Questions1. Before expiration, the time value of an in the money call option is alwaysA) equal to zero.B) positive.C) negative.D) equal to the stock price minus the exercise price.E) none of the above.Answer: B Difficulty: EasyRationale: The difference between the actual option price and the intrinsic value is called the time value of the option.2. Before expiration, the time value of an in the money put option is alwaysA) equal to zero.B) negative.C) positive.D) equal to the stock price minus the exercise price.E) none of the above.Answer: C Difficulty: EasyRationale: The difference between the actual option price and the intrinsic value is called the time value of the option.3. Before expiration, the time value of an at the money call option is alwaysA) positive.B) equal to zero.C) negative.D) equal to the stock price minus the exercise price.E) none of the above.Answer: A Difficulty: EasyRationale: The difference between the actual option price and the intrinsic value is called the time value of the option.4. Before expiration, the time value of an at the money put option is alwaysA) equal to zero.B) equal to the stock price minus the exercise price.C) negative.D) positive.E) none of the above.Answer: D Difficulty: EasyRationale: The difference between the actual option price and the intrinsic value is called the time value of the option.5. A call option has an intrinsic value of zero if the option isA) at the money.B) out of the money.C) in the money.D) A and C.E) A and B.Answer: E Difficulty: EasyRationale: Intrinsic value can never be negative; thus it is set equal to zero for out of the money and at the money options.6. A put option has an intrinsic value of zero if the option isA) at the money.B) out of the money.C) in the money.D) A and C.E) A and B.Answer: E Difficulty: EasyRationale: Intrinsic value can never be negative; thus it is setequal to zero for out of the money and at the money options.7. Prior to expirationA) the intrinsic value of a call option is greater than its actual value.B) the intrinsic value of a call option is always positive.C) the actual value of call option is greater than the intrinsic value.D) the intrinsic value of a call option is always greater than its time value.E) none of the above.Answer: C Difficulty: ModerateRationale: Prior to expiration, any option will be selling for a positive price, thus the actual value is greater than the intrinsic value.8. Prior to expirationA) the intrinsic value of a put option is greater than its actual value.B) the intrinsic value of a put option is always positive.C) the actual value of put option is greater than the intrinsic value.D) the intrinsic value of a put option is always greater than its time value.E) none of the above.Answer: C Difficulty: ModerateRationale: Prior to expiration, any option will be selling for a positive price, thus the actual value is greater than the intrinsic value.9. If the stock price increases, the price of a put option on that stock __________ and thatof a call option __________.A) decreases, increasesB) decreases, decreasesC) increases, decreasesD) increases, increasesE) does not change, does not changeAnswer: A Difficulty: ModerateRationale: As stock prices increases, call options become more valuable (the owner can buy the stock at a bargain price). As stock prices increase, put options become less valuable (the owner can sell the stock at a price less than market price).10. If the stock price decreases, the price of a put option on that stock __________ and thatof a call option __________.A) decreases, increasesB) decreases, decreasesC) increases, decreasesD) increases, increasesE) does not change, does not changeAnswer: C Difficulty: ModerateRationale: As stock prices decreases, call options become less valuable (the owner can buy the stock at a bargain price). As stock prices decreases, put options become more valuable (the owner can sell the stock at a price less than market price).11. Other things equal, the price of a stock call option is positively correlated with thefollowing factors exceptA) the stock price.B) the time to expiration.C) the stock volatility.D) the exercise price.E) none of the above.Answer: D Difficulty: ModerateRationale: The exercise price is negatively correlated with the call option price.12. Other things equal, the price of a stock put option is positively correlated with thefollowing factors exceptA) the stock price.B) the time to expiration.C) the stock volatility.D) the exercise price.E) none of the above.Answer: A Difficulty: ModerateRationale: The exercise price is negatively correlated with the stock price.13. The price of a stock put option is __________ correlated with the stock price and__________ correlated with the striking price.A) positively, positivelyB) negatively, positivelyC) negatively, negativelyD) positively, negativelyE) not, notAnswer: B Difficulty: ModerateRationale: The lower the stock price, the more valuable the call option. The higher the striking price, the more valuable the put option.14. The price of a stock call option is __________ correlated with the stock price and__________ correlated with the striking price.A) positively, positivelyB) negatively, positivelyC) negatively, negativelyD) positively, negativelyE) not, notAnswer: D Difficulty: ModerateRationale: The lower the stock price, the more valuable the call option. The higher the striking price, the more valuable the put option.15. All the inputs in the Black-Scholes Option Pricing Model are directly observable exceptA) the price of the underlying security.B) the risk free rate of interest.C) the time to expiration.D) the variance of returns of the underlying asset return.E) none of the above.Answer: D Difficulty: ModerateRationale: The variance of the returns of the underlying asset is not directly observable, but must be estimated from historical data, from scenario analysis, or from the prices of other options.16. Delta is defined asA) the change in the value of an option for a dollar change in the price of the underlyingasset.B) the change in the value of the underlying asset for a dollar change in the call price.C) the percentage change in the value of an option for a one percent change in the valueof the underlying asset.D) the change in the volatility of the underlying stock price.E) none of the above.Answer: A Difficulty: ModerateRationale: An option's hedge ratio (delta) is the change in the price of an option for $1 increase in the stock price.17. A hedge ratio of 0.70 implies that a hedged portfolio should consist ofA) long 0.70 calls for each short stock.B) short 0.70 calls for each long stock.C) long 0.70 shares for each short call.D) long 0.70 shares for each long call.E) none of the above.Answer: C Difficulty: ModerateRationale: The hedge ratio is the slope of the option value as a function of the stock value. A slope of 0.70 means that as the stock increases in value by $1, the optionincreases by approximately $0.70. Thus, for every call written, 0.70 shares of stock would be needed to hedge the investor's portfolio.18. A hedge ratio for a call option is ________ and a hedge ratio for a put option is ______.A) negative, positiveB) negative, negativeC) positive, negativeD) positive, positiveE) zero, zeroAnswer: C Difficulty: ModerateRationale: Call option hedge ratios must be positive and less than 1.0, and put option ratios must be negative, with a smaller absolute value than 1.0.19. A hedge ratio for a call is alwaysA) equal to one.B) greater than one.C) between zero and oneD) between minus one and zero.E) of no restricted valueAnswer: C Difficulty: ModerateRationale: See rationale for test bank question 21.18.20. A hedge ratio for a put is alwaysA) equal to one.B) greater than one.C) between zero and oneD) between minus one and zero.E) of no restricted valueAnswer: D Difficulty: ModerateRationale: See rationale for test bank question 21.18.21. The dollar change in the value of a stock call option is alwaysA) lower than the dollar change in the value of the stock.B) higher than the dollar change in the value of the stock.C) negatively correlated with the change in the value of the stock.D) B and C.E) A and C.Answer: A Difficulty: ModerateRationale: The slope of the call option valuation function is less than one.22. The percentage change in the stock call option price divided by the percentage change inthe stock price is calledA) the elasticity of the option.B) the delta of the option.C) the theta of the option.D) the gamma of the option.E) none of the above.Answer: A Difficulty: ModerateRationale: Option price elasticity measures the percent change in the option price as a function of the percent change in the stock price.23. The elasticity of a stock call option is alwaysA) greater than one.B) smaller than one.C) negative.D) infinite.E) none of the above.Answer: A Difficulty: ModerateRationale: Option prices are much more volatile than stock prices, as option premiums are much lower than stock prices.24. The elasticity of a stock put option is alwaysA) positive.B) smaller than one.C) negativeD) infiniteE) none of the above.Answer: C Difficulty: ModerateRationale: As put options become more valuable as stock prices decline, the elasticity ofa put option must be negative.25. Portfolio A consists of 150 shares of stock and 300 calls on that stock. Portfolio Bconsists of 575 shares of stock. The call delta is 0.7. Whichportfolio has a higher dollar exposure to a change in stock price?A) Portfolio BB) Portfolio AC) The two portfolios have the same exposureD) A if the stock price increases and B if it decreases.E) B if the stock price decreases and A if it increases.Answer: A Difficulty: DifficultRationale: 300 calls (0.7) = 210 shares + 150 shares = 360 shares; 575 shares = 575 shares.26. Portfolio A consists of 500 shares of stock and 500 calls on that stock. Portfolio Bconsists of 800 shares of stock. The call delta is 0.6. Which portfolio has a higher dollar exposure to a change in stock price?A) Portfolio BB) Portfolio AC) The two portfolios have the same exposureD) A if the stock price increases and B if it decreases.E) B if the stock price decreases and A if it increases.Answer: C Difficulty: DifficultRationale: 500 calls (0.6) = 300 shares + 500 shares = 800 shares; 800 shares = 800 shares.27. Portfolio A consists of 400 shares of stock and 400 calls on that stock. Portfolio Bconsists of 500 shares of stock. The call delta is 0.5. Which portfolio has a higher dollar exposure to a change in stock price?A) Portfolio BB) Portfolio AC) The two portfolios have the same exposureD) A if the stock price increases and B if it decreases.E) B if the stock price decreases and A if it increases.Answer: B Difficulty: DifficultRationale: 400 calls (0.5) = 200 shares + 400 shares = 600 shares; 500 shares = 500 shares.28. Portfolio A consists of 600 shares of stock and 300 calls on that stock. Portfolio Bconsists of 685 shares of stock. The call delta is 0.3. Which portfolio has a higher dollar exposure to a change in stock price?A) Portfolio BB) Portfolio AC) The two portfolios have the same exposureD) A if the stock price increases and B if it decreases.E) B if the stock price decreases and A if it increases.Answer: B Difficulty: DifficultRationale: 300 calls (0.3) = 90 shares + 600 shares = 690 shares; 685 shares = 685shares.29. A portfolio consists of 100 shares of stock and 1500 calls on that stock. If the hedgeratio for the call is 0.7, what would be the dollar change in the value of the portfolio in response to a one dollar decline in the stock price?A) +$700B) +$500C) -$1,150D) -$520E) none of the aboveAnswer: C Difficulty: DifficultRationale: -$100 + [-$1,500(0.7)] = -$1,150.30. A portfolio consists of 800 shares of stock and 100 calls on that stock. If the hedge ratiofor the call is 0.5. What would be the dollar change in the value of the portfolio inresponse to a one dollar decline in the stock price?A) +$700B) -$850C) -$580D) -$520E) none of the aboveAnswer: B Difficulty: DifficultRationale: -$800 + [-$100(0.5)] = -$850.31. A portfolio consists of 225 shares of stock and 300 calls on that stock. If the hedge ratiofor the call is 0.4, what would be the dollar change in the value of the portfolio inresponse to a one dollar decline in the stock price?A) -$345B) +$500C) -$580D) -$520E) none of the aboveAnswer: A Difficulty: DifficultRationale: -$225 + [-$300(0.4)] = -$345.32. A portfolio consists of 400 shares of stock and 200 calls on that stock. If the hedge ratiofor the call is 0.6, what would be the dollar change in the value of the portfolio inresponse to a one dollar decline in the stock price?A) +$700B) +$500C) -$580D) -$520E) none of the aboveAnswer: D Difficulty: DifficultRationale: -$400 + [-$200(0.6)] = -$520.33. If the hedge ratio for a stock call is 0.30, the hedge ratio for a put with the sameexpiration date and exercise price as the call would be ________.A) 0.70B) 0.30C) -0.70D) -0.30E) -.17Answer: C Difficulty: DifficultRationale: Call hedge ratio = N(d1); Put hedge ratio = N(d1) - 1; 0.3 - 1.0 = -0.7.34. If the hedge ratio for a stock call is 0.50, the hedge ratio for a put with the sameexpiration date and exercise price as the call would be ________.A) 0.30B) 0.50C) -0.60D) -0.50E) -.17Answer: D Difficulty: DifficultRationale: Call hedge ratio = N(d1); Put hedge ratio = N(d1) - 1; 0.5 - 1.0 = -0.5.35. If the hedge ratio for a stock call is 0.60, the hedge ratio for a put with the sameexpiration date and exercise price as the call would be _______.A) 0.60B) 0.40C) -0.60D) -0.40E) -.17Answer: D Difficulty: DifficultRationale: Call hedge ratio = N(d1); Put hedge ratio = N(d1) - 1; 0.6 - 1.0 = -0.4.36. If the hedge ratio for a stock call is 0.70, the hedge ratio for a put with the sameexpiration date and exercise price as the call would be _______.A) 0.70B) 0.30C) -0.70D) -0.30E) -.17Answer: D Difficulty: DifficultRationale: Call hedge ratio = N(d1); Put hedge ratio = N(d1) - 1; 0.7 - 1.0 = -0.3.37. A put option is currently selling for $6 with an exercise price of $50. If the hedge ratiofor the put is -0.30 and the stock is currently selling for $46, what is the elasticity of the put?A) 2.76B) 2.30C) -7.67D) -2.76E) -2.30Answer: E Difficulty: DifficultRationale: % stock price change = ($47 - $46)/$46 = 0.021739; % option price change = $5.70 - $6.00)/$6 = - 0.05; - 0.05/0.021739 = - 2.30.38. A put option on the S&P 500 index will best protect ________A) a portfolio of 100 shares of IBM stock.B) a portfolio of 50 bonds.C) a portfolio that corresponds to the S&P 500.D) a portfolio of 50 shares of AT&T and 50 shares of Xerox stocks.E) a portfolio that replicates the Dow.Answer: C Difficulty: EasyRationale: The S&P 500 index is more like a portfolio that corresponds to the S&P 500 and thus is more protective of sucha portfolio than of any of the other assets.39. Higher dividend payout policies have a __________ impact on the value of the call anda __________ impact on the value of the put.A) negative, negativeB) positive, positiveC) positive, negativeD) negative, positiveE) zero, zeroAnswer: D Difficulty: ModerateRationale: Dividends lower the expected stock price, and thus lower the current call option value and increase the current put option value.40. Lower dividend payout policies have a __________ impact on the value of the call anda __________ impact on the value of the put.A) negative, negativeB) positive, positiveC) positive, negativeD) negative, positiveE) zero, zeroAnswer: C Difficulty: ModerateRationale: Dividends lower the expected stock price, and thus lower the current call option value and increase the current put option value.41. A one dollar decrease in a call option's exercise price would result in a(n) __________in the call option's value of __________ one dollar.A) increase, more thanB) decrease, more thanC) decrease, less thanD) increase, less thanE) increase, exactlyAnswer: D Difficulty: ModerateRationale: Option prices are less than stock prices, thus changes in stock prices (market or exercise) are greater (in absolute terms) than are changes in prices of options.42. Which one of the following variables influences the value of call options?I)Level of interest rates.II)Time to expiration of the option.III)Dividend yield of underlying stock.IV)Stock price volatility.A) I and IV only.B) II and III only.C) I, II, and IV only.D) I, II, III, and IV.E) I, II and III only.Answer: D Difficulty: ModerateRationale: All of the above variables affect call option prices.43. Which one of the following variables influences the value of put options?I)Level of interest rates.II)Time to expiration of the option.III)Dividend yield of underlying stock.IV)Stock price volatility.A) I and IV only.B) II and III only.C) I, II, and IV only.D) I, II, III, and IV.E) I, II and III only.Answer: D Difficulty: ModerateRationale: All of the above variables affect put option prices.44. An American call option buyer on a non-dividend paying stock willA) always exercise the call as soon as it is in the money.B) only exercise the call when the stock price exceeds the previous highC) never exercise the call early.D) buy an offsetting put whenever the stock price drops below the strike price.E) none of the above.Answer: C Difficulty: ModerateRationale: An American call option buyer will not exercise early if the stock does not pay dividends; exercising forfeits the time value. Rather, the option buyer will sell the option to collectboth the intrinsic value and the time value.45. Relative to European puts, otherwise identical American put optionsA) are less valuable.B) are more valuable.C) are equal in value.D) will always be exercised earlier.E) none of the above.Answer: B Difficulty: ModerateRationale: It is valuable to exercise a put option early if the stock drops below athreshold price; thus American puts should sell for more than European puts.46. Use the two-state put option value in this problem. S O = $100; X = $120; the twopossibilities for S T are $150 and $80. The range of P across the two states is _____; the hedge ratio is _______.A) $0 and $40; -4/7B) $0 and $50; +4/7C) $0 and $40; +4/7D) $0 and $50; -4/7E) $20 and $40; +1/2Answer: A Difficulty: DifficultRationale: When S T = $150; P = $0; when S T =$80: P = $40; ($0 - $40)/($150 - $80) = -4/7.47. Use the Black-Scholes Option Pricing Model for the following problem. Given: S O =$70; X = $70; T = 70 days; r = 0.06 annually (0.0001648 daily); σ = 0.020506 (daily).No dividends will be paid before option expires. The value ofthe call option is_______.A) $10.16.B) $5.16.C) $0.00.D) $2.16.E) none of the above.Answer: B Difficulty: DifficultRationale: d2 = 0.1530277 - (0.020506)(70)1/2 = -0.01853781; N(d1) = 0.5600; N(d2) = 0.4919; C = 0.5600($70) - $70[e-(0.0001648)(70)]0.4919 = $5.16.48. Empirical tests of the Black-Scholes option pricing modelA) show that the model generates values fairly close to the prices at which optionstrade.B) show that the model tends to overvalue deep in the money calls and undervaluedeep out of the money calls.C) indicate that the mispricing that does occur is due to the possible early exercise ofAmerican options on dividend-paying stocks.D) A and C.E) A, B, and C.Answer: D Difficulty: DifficultRationale: Studies have shown that the model tends to undervalue deep in the money calls and to overvalue deep out of the money calls. The other statements are true.49. Options sellers who are delta-hedging would most likelyA) sell when markets are fallingB) buy when markets are risingC) both A and B.D) sell whether markets are falling or rising.E) buy whether markets are falling or rising.Answer: C Difficulty: ModerateUse the following to answer questions 50-54:An American-style call option with six months to maturity has a strike price of $35. The underlying stock now sells for $43. The call premium is $12.50. What is the intrinsic value of the call?A) $12B) $8C) $0D) $23E) none of the above.Answer: B Difficulty: EasyRationale: 43 - 35 = $8.51. What is the time value of the call?A) $8B) $12C) $0D) $4E) cannot be determined without more information.Answer: D Difficulty: ModerateRationale: 12 - (43 - 35) = $4.52. If the option has delta of .5, what is its elasticity?A) 4.17B) 2.32C) 1.79D) 0.5E) 1.5Answer: C Difficulty: DifficultRationale: [(12.50 - 12)/12] / [(44 - 43)/43] = 1.79.53. If the risk-free rate is 6%, what should be the value of a put option on the same stockwith the same strike price and expiration date?A) $3.00B) $2.02C) $12.00D) $5.25E) $8.00Answer: A Difficulty: DifficultRationale: P = 12 - 43 + 35/(1.06).5; P = $3.0054. If the company unexpectedly announces it will pay its first-ever dividend 3 months fromtoday, you would expect thatA) the call price would increase.B) the call price would decrease.C) the call price would not change.D) the put price would decrease.E) the put price would not change.Answer: B Difficulty: ModerateRationale: As an approximation, subtract the present value of the dividend from the stock price and recompute the Black-Scholes value with this adjusted stock price. Since the stock price is lower, the option value will be lower.55. Since deltas change as stock values change, portfolio hedge ratios must be constantlyupdated in active markets. This process is referred to asA) portfolio insurance.B) rebalancing.C) option elasticity.D) gamma hedging.E) dynamic hedging.Answer: E Difficulty: ModerateRationale: Dynamic hedgers will convert equity into cash in market declines to adjust for changes in option deltas.56. In volatile markets, dynamic hedging may be difficult to implement becauseA) prices move too quickly for effective rebalancing.B) as volatility increases, historical deltas are too low.C) price quotes may be delayed so that correct hedge ratios cannot be computed.D) volatile markets may cause trading halts.E) all of the above.Answer: E Difficulty: EasyRationale: All of the above correctly describe the problems associated with dynamic hedging in volatile markets.57. Rubinstein (1994) observed that the performance of the Black-Scholes model haddeteriorated in recent years, and he attributed this toA) investor fears of another market crash.B) higher than normal dividend payouts.C) early exercise of American call options.D) decreases in transaction costs.E) none of the above.Answer: A Difficulty: ModerateRationale: Options on the same stock with the same strike price should have the same implied volatility, but the exhibit progressively different implied volatilities.Rubinstein believes this is due to fear of another marketcrash.58. The time value of a call option isI)the difference between the option's price and the value it would have if it wereexpiring immediately.II)the same as the present value of the option's expected future cash flows.III)the difference between the option's price and its expected future value.IV)different from the usual time value of money concept.A) IB) I and IIC) II and IIID) IIE) I and IVAnswer: E Difficulty: EasyRationale: The time value of an option is described by I, and is different from the time value of money concept frequently used in finance.59. The time value of a put option isI)the difference between the option's price and the value it would have if it wereexpiring immediately.II)the same as the present value of the option's expected future cash flows.III)the difference between the option's price and its expected future value.IV)different from the usual time value of money concept.A) IB) I and IIC) II and IIID) IIE) I and IVAnswer: E Difficulty: EasyRationale: The time value of an option is described by I, and is different from the time value of money concept frequently used in finance.60. You purchased a call option for a premium of $4. The call has an exercise price of $29and is expiring today. The current stock price is $31. What would be your best course of action?A) Exercise the call because the stock price is greater than the exercise price.B) Do not exercise the call because the stock price is greater than the exercise price.C) Do not exercise the call because the difference between the exercise price and thestock price is not enough to cover the amount of the premium.D) Exercise the call to get a positive net return on the investment.E) Do not exercise the call to avoid a negative net return on the investment.Answer: A Difficulty: ModerateRationale: If you exercise the call, your return will be ($31-29-4)/$4 = -50%. But if you don't exercise the call your return will be -$4/4 = -100%.61. As the underlying stock's price increased, the call option valuation function's slopeapproachesA) zero.B) one.C) two times the value of the stock.D) one-half time s the value of the stock.E) infinityAnswer: B Difficulty: ModerateRationale: As the stock price increases the value of the call option increases in price one for one with the stock price. The option is very likely to be exercised.。