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Read the case carefully and answer the questions given at the end: CALLS PUT A B C Months of expiration 3 9 3 Continuous yearly risk-free Rate (Rf) 10% 10% 10% Discrete yearly Rf 10.52% 10.52% 10.52% Standard deviation of Stock returns 40% 40% 40% Exercise price Rs.55 Rs.55 Rs.55 Option price Rs.2.56 - Rs.6.20 Stock price Rs.50 Rs.50 Rs.50 Cash Dividend Re.0 Re.0 Re.0 1) Why should call B sell for more than call A? 2) Is the put call parity model working for options A&C? 3) Calculate the Black Scholes values of call A & Call B?

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Sean Alicandri, a sophisticated investor who is both willing and able to take risk, has just noticed that Mid- West Airlines has become the target of a hostile takeover. Prior to the announcement of the offer to purchase the stock for $72 a share, the stock had been selling for $59. Immediately after the offer, the offer the stock rose to $75, a premium over the offer price. Such premiums are often indicative that investors expect a higher price could occur if a bidding was erupts for the company or if management buyout of the firm. Of course, if neither of these scenarios occurs, the price of the stock could fall back to the $72 offer price. In addition, if the offer were to be withdrawn or defeated by management, the price of the stock could fall below the original stock price. Alicandri has no reason to anticipate that any of these possibilities will be the final outcome, but the realizes that the price of the stock will not remain at $75. If a bidding war erupts, the price could easily exceed$100. Conversely, if the takeover fails, he expects the price to decline below $55 a share, since he previously believed that the price of the stock was overvalued at $59. With such uncertainty, Alicandri does not want to own the stock but is intrigued with the possibility of earning a profit from a price movement that he is certain must occur. Currently there are several three months put and all options traded on the stock. Their strike and market prices are as follows: Strike Price Market Price of Call Market Price of Put $50 $26.00 $0.125 55 21.50 0.50 60 17.00 1.00 65 13.25 1.75 70 8.00 3.50 75 4.25 6.00 80 1.00 9.75 Alicandri decides the best strategy is to purchase both a put and a call option (to establish a straddle). Deciding on a strategy is one thing; determining the best way to execute it is quite another. For example, he could buy the options with the extreme strike price (i.e. the call at $80 and the put at $50). Or he could buy the options with the strike price closest to the original $72 offer price (i.e. buy the put and the call at $70). To help determine the potential profits and losses from various positions, Alicandri developed profit profiles at various stock prices by filling in the following chart for each position: Price of the stock Intrinsic Value of the Call Profit on the Call Intrinsic Value of the Put Profit on the Put Net Profit $50 55 60 65 70 75 80 85 To limit the number of calculations, he decided to make three comparisons: (1) the purchase of two inexpensive options-buy the call with the $80 strike price and the put with the $60 strike price, (2) the purchase of the options with the $70 strike price, and (3) the purchase of the options with the price closest to the original stock price (i.e., the options with the $60 strike price). Construct Alicandri’s profit profiles and answer the following questions. 1) Which strategy works best if a bidding war erupts? 2) Which strategy works best if the hostile takeover is defeated? 3) Which strategy works best if the original offer price becomes the final price? 4) Which of the three positions produces the worst result and under what condition does it occur? 5) If you were Alipcandri’s financial advisor, which strategy would you advise he establish? Or would you argue that he not speculate on this takeover?

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Introduction Mangalore Refinery and Petrochemicals Limited (MRPL) and Reliance Petroleum Limited (RPL) Table 1 : MRPL’s Income Statement and Balance Sheet (Rs. in mn) Particulars April 1999 – March 2000 April 2000 – March 2001 April 2001 – march 2002 Net Sales 30212.04 28891.50 53714.40 Other Income 701.37 524.50 439.90 Total Income 30913.41 29415.70 54154.30 Expenditure (30112.79) (27917.50) (51587.00) Interest (2369.59) (2378.30) (6722.90) Depreciation (1427.63) (1728.60) (3633.50) Tax (0.24) (0.30) 2864.30 Total Expenditure (33910.25) (32024.70) (61943.40) Profit after Tax (2996.84) (2609.00) (4924.80) Equity 7921.00 7921.00 7921.00 Reserves 1714.50 (1506.96) (4489.56) Debt 54082.97 50516.52 55356.94 . Table II : RPL’s Income statement and Balance Sheet Particulars April 2001 – March 2002 April 2000 – March 2001 Net Sales 331170.00 309630.00 Other Income 3550.00 2200.00 Total Income 334720.00 311830.00 Expenditure (299430.00) (279090.00) Interest (9550.00) (10320.00) Depreciation (8020.00) (6610.00) Tax (980.00) (1170.00) Total Expenditure (317980.00) (297190.30) Profit after Tax 16740.00 14640.00 Equity 52020.00 47488.10 Reserves - 34974.20 Debt - 74921.30 Table III : Quarterly Closing Prices (04/30/1996 to 09/30/2002) Date BSE-30 RPL MRPL 04/30/96 3376.64 14.75 32.50 06/28/96 3731.96 12.90 28.25 09/30/96 3519.42 10.25 19.35 12/24/96 2883.88 10.40 20.60 03/31/96 3360.89 12.70 17.65 06/30/97 4256.09 17.40 18.10 09/30/97 3902.03 19.00 21.60 12/31/97 3658.98 23.55 19.85 03/31/98 3892.75 20.50 19.25 06/30/98 3250.69 20.00 16.15 09/30/98 2812.49 17.60 13.90 12/31/98 3055.41 18.80 12.90 03/31/98 3739.96 18.70 10.30 06/30/99 4140.73 27.05 19.00 09/30/99 4764.92 46.90 21.00 12/30/99 5005.82 65.70 16.70 03/31/00 5001.28 60.04 12.35 06/30/00 4748.77 53.95 9.90 09/29/00 4090.38 56.75 8.80 12/29/00 3972.12 56.60 8.80 03/30/01 3604.39 48.55 7.70 06/29/01 3456.78 47.00 6.85 09/28/01 2811.66 29.75 6.30 12/31/01 3263.33 29.30 6.80 03/28/02 3469.35 25.85 6.80 06/28/02 3244.70 24.05 10.00 09/30/02 2930.51 23.10 7.65 Questions 1. Calculate the average return and risk on shares of RPL and MRPL during the period 1996-2002. divide the total risk on each of the stocks between systematic and unsystematic components. Calculate each of the components as a percentage of the total risk.

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Programming in C JayLQue@hotmail.com 1. Which of the types listed below can be the type of the result value returned by a user-defined function? A) int B) double C) char D) all of the above E) none of the above 2. What is the output from this program? #include void do_something(int *thisp, int that) { int the_other; the_other = 5; that = 2 + the_other; *thisp = the_other * that; } int main(void) { int first, second; first = 1; second = 2; do_something(&second, first); printf("%4d%4d\n", first, second); return 0; } A) 35 2 B) 1 35 C) 35 7 D) 1 2 E) 0 3. In function apart defined below, how many of the parameters are considered input parameters? void apart(double x, int *wholep, double *fracp) { *wholep = (int)x; *fracp = x - *wholep; } A) 0 B) 1 C) 2 D) 3 E) all 4. Variables that represent neither problem inputs nor problem outputs but are needed for internal computations are called _____. A) problem constants B) prototypes C) results D) formula variables E) program variables 5. This question concerns the following program fragment: char r, x, y, z, w; scanf("%c%c%c%c", &x, &y, &z, &w); if (x < y) r=x; else r=y; if (r>z) r=z; if (r>w) r=w; printf("%c\n", r); The program's effect can best be described as: A) It displays the letter 'r' after comparing it to x, y, and z. B) Of the four input characters, it displays the one that comes first in the alphabet. C) Of the four input characters, it displays the one that comes last in the alphabet. D) Of the four input characters, it displays the one that comes second in the alphabet. E) It displays nothing since characters cannot be compared. 6. In a function that receives a value from the main function via a parameter and then displays the parameter value on the screen, that parameter is considered __________. A) an input parameter B) an output parameter C) an input/output parameter D) a local variable E) a stub 7. What is the complement of the following expression? n||a <= b && c != 100 A) !n || a > b || c == 100 B) !(n && (a > b || c == 100)) C) !n && (a > b || c == 100) D) !(n || (a > b || c == 100)) E) none of the above 8. The if statement: if (13 < 12) printf("never\n"); else printf("always\n"); A) displays never. B) displays always. C) will not compile since 13 is not less than 12. D) causes a run-time error since 13 is not less than 12. E) displays nothing since 13 is not less that 12. 9. How many lines of output will be displayed by the following program fragment? i=0; do { for (j = 0; j < 4; j = j + 1) printf("%d\n", i + j); i=i + 1; } while (i < 5); A) 0 B) 7 C) 9 D) 16 E) 20 10. For what exact range of values of variable x does the following code segment display the letter 'C'? if (x <= 200) if (x < 100) if (x <= 0) printf("A\n"); else printf("B\n"); else printf("C\n"); else printf("D\n"); A) 0 < x < 100 B) x <= 0 C) 100 <= x <= 200 D) x > 200 E) 100 < x <= 200 11. The effect of the following program segment can best be described as __________. if (x > y) z = x; if (x == y) z=0; if (x < y) z = y; A) the smaller of x and y is stored in z. B) the larger of x and y is stored in z. C) the larger of x and y is stored in z unless x and y are equal, in which case z is assigned zero. D) the larger of x and y is stored in z unless x and y are not equal, in which case z is assigned zero. E) none of the above. 12. The expression: x *= i + j / y; is equivalent to ______. A) x = x * i + j / y; B) x = (x * i) + j / y; C) x = (x * i + j) / y; D) x = x * (i + j / y); E) none of the above 13. The facts that a function assumes to be true of the arguments that it receives are called __________. A) function input validations B) local variables C) postconditions D) preconditions E) none of the above 14. How many times is the loop body of the while statement executed? Refer to the following program segment. Assume that all variables are of type int. z=0; g=0; s=0; i=0; while (i < 50) { scanf("%d", &t); s=s + t; if (t >= 0) g=g + 1; else z=z + 1; i=i + 1; } A) once B) never C) 49 times D) 50 times E) until a number 50 or larger is entered 15. A special value that marks the end of a list of input data is called a __________. A) terminal value B) sentinel value C) loop control value D) input value E) loop termination value 16. Here is the prototype of a function: void five (double x, double* yp, int* zp); Given these variable declarations, which calls to five are valid? int m, n double p, q A) five(m, &p, &n); B) q = five(6.2, &p, &m); C) five(p, &q, &m); D) five(7.1, &p, &q); E) a and c only F) a, b, c, and d 17. The ______ of a function take(s) information into the function from the calling statement. A) local variables B) input arguments C) output arguments D) prototype E) purpose 18. If the input to the program segment below is 85, what is its output? scanf("%d", &s); if (s >= 90) printf ("A\n"); else if (s >= 70) printf ("C\n"); else if (s >= 80) printf ("B\n"); else printf ("D\n"); A) A B) B C) C D) D E) None of the above 19. The value stored in variable s at the end of the execution of the loop could best be described as __________. Refer to the following program segment. Assume that all variables are of type int. z=0; g=0; s=0; i=0; while (i < 50) { scanf("%d", &t); s=s + t; if (t >= 0) g=g + 1; else z=z + 1; i=i + 1; } A) the average of the numbers scanned B) the sum of the numbers scanned C) the largest of the numbers scanned D) how many numbers were scanned E) the sentinel value 20. 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