Question 2
- a)What is the price of an American-style call option assuming a 4% annual risk-free rate, a strike price = $150, and 3 years to maturity. In each year the price can either rise by a factor of 1.3 or fall by a factor of 0.9. The current price of the underlying asset is $100 and it pays no dividends. (4 marks)
- b)Why is the price in part a different than you would get from inputting a 10% drift and 20% volatility into the Black Scholes equation? (2 marks)
- c)What would be the price of an American-style put option on the same stock with the same maturity as in part a above? (4 marks)
Question 3
- a)Identify 3 of the 5 advantages of using investment funds over making an investment in an individual security. (3 marks)
- b)Explain briefly why the returns earned by investors in index funds has typically been higher than the returns earned by investors in traditional mutual funds. (2 marks)
- c)In February of 2019, you bought 800 units in an actively managed mutual fund for $24.66 each. As a result of your purchase, the number of units outstanding was 1,240,768. Over the last 12 months, the fund earned a 42% return, increased asset under management by 288%, and incurred $0.88 per unit in management fees (paid at the end of the period). What is the fund’s current NAV? (3 marks)
- d)What is the main difference between a mutual fund and an ETF? (1 mark)
- e)Why did ETFs not exist in the 1950s? (1 mark)
0 comments