Question

Jorge purchased a six-month put on CPZ stock at a cost of $150. The strike price was $17. At what market price does Jorge just break-even on this investment? Ignore transaction costs and taxes.

$15.50

$16.50

$17

$17.50

Phil is a bond fund manager. To hedge the bond portfolio against rising interest rates, Phil should:

-buy Treasury Notes.

-buy interest rate futures.

-buy a stock-index future.

-sell interest rate futures.

Colleen has been trying to figure out what to do with her investment portfolio. A vertical spread with not an excessive amount of risk might involve:

-buying a call at a lower strike price and writing a call at a higher strike price.

-buying a call and a put on the same stock with the same strike price.

-buying a call at a lower strike price and writing a put at a higher price.

-buying a put at a lower strike price and a call at a higher strike price.

When you take the reciprocal of a stock's earnings yield, you get the Price/Earnings (P/E) ratio. Which of the following leads to lofty P/E ratios?

-periods of high inflation

-high debt ratios

-high rate of earnings growth

-high dividend payout ratios

JLI is a pharmaceutical firm. BQX is a retailer. JLI's debt to equity ratio is 45% while BQX's is 71%. By comparing these ratios we can conclude

that BQX uses too little equity financing.

that BQX is in danger of bankruptcy.

that JLI uses too little debt financing.

very little because the firms are in different industries.

Answer 1

1]

break even price of long put option = strike price - premium

break even price of long put option = $17 - $1.50

break even price of long put option = $15.50

2]

sell interest rate futures

Bond prices and interest rates are inversely related. If interest rates rise, the value of the bond portfolio would fall. To hedge against this, Phil should sell interest rate futures because interest rate futures gain in value if interest rates rise. Thus, the gains on the interest rate futures would offset the losses on the bond portfolio

3]

buying a call at a lower strike price and writing a call at a higher strike price.

4]

high rate of earnings growth