Finding the market risk premium.

Calculate the cost of equity for a particular firm (Nordstrom JWN) using the CAPM. Their Beta is 1.25 and this is appropriate to use as the 10-year treasury bond rate which I found to be 3.68% as the risk free rate. However, to calculate the market risk premium, I need to ascertain the market rate. Where can I find this?

Active asset allocation among countries and performance against a world market index

In view of the efficient market hypothesis (EMH)in Investment analysis, I want to know whether active asset allocation among countries could consistently outperform a world market index (Yes or No and why). As a second part of my question, I want you to discuss the implications of integration versus segmentation of International ...continues

Swap fixed rate (SFR) for a plain vanilla, two-year interest rate swap

What would be the swap fixed rate (SFR) for a plain vanilla, two-year interest rate swap, payments every six months beginning 07/01/0X, with the following assumptions/data: Swap initiation - January 1, 200X FRA1,0=2.221%; FRA1,1=2.258%; FRA1,2=2.322%; FRA1,3=2.388%;FRA1,4=2.520%;FRA1,5=2.632% (Read the notation, FRA1,0 as "si ...continues

Calculating hedging using future contracts and using the optimal hedge ratio

You wish to hedge 90 percent of the current portfolio value with futures. The value of the portfolio is $50 million and tracks the S&P 500 index. The index in 1,076.32 ($250 per point) and the portfolio has a beta of 1.2. Calculate the appropriate hedging using futures contracts. Hint: Calculate using the optimal hedge ra ...continues

Calculating fixed rate payments in interest rate swaps

Using the following data, calculated the fixed-rate payer's first two net quarterly payments/receipts for a hypothetical rate swap described below: Notional Principal $10 million Fixed Rate 7.0% Days in first quarter 91 Days in second quarter 92 Current LIBOR (LIBOR0) 5.0% Expected LIBOR (LIBOR1) 5.3% Expected LIBO ...continues

Arbitrage opportunity for a T-bill

Based solely on the following information, does an arbitrage opportunity exist (Treasury quotes in 100% of par, 32nds)? JUN 10-year Treasury note futures contract 115-18 10-year Treasury note spot quote 115-00 Risk-free rate 1.75% Expiration 90-days Hint: To be arbitrage neutral, the futures price must equal th ...continues

Calculating effective fixed rate

A company has a variable-rate loan with a bank paying LIBOR plus 65. The company wishes to create a synthetic fixed-rate loan and enters into an interest rate swap paying a swap fixed rate of 9% and receives LIBOR. The company also pays an annual swap spread of 35 base points to the swap dealer. Calculate the effective fixed ...continues

Calculate optimal time to invest - Decompose the risk of each asset into market risk and firm specific risk - Calculate option payoff

1) Suppose you own a large forest that is due for harvest. The pulp market is picking up, so you know that if you start harvest this year you will forgo rising prices in the future. There is, however, a cost advantage to starting the harvest as soon as possible. The table below shows the present value of the revenue stream and t ...continues

Interpretation of Black Sholes Formula

I have built a Black Sholes Continuous Dividend spreadsheet model, and inputted parameters for a given problem to arrive at a call and put option price. I'm pretty confident in the option prices I've arrived at. W ith the prices computed, I am now supposed to adjust certain variables in the Black Sholes model to see what impact ...continues

OZEN Forward rate agreement with Bank-ZQ: determine cost of loan in two cases

(ii) OZEN Inc plans to borrow £6 million in 180 days. The loan will be taken out at the appropriate LIBOR rate on the day the loan commence and will be repaid in full 90 days later. OZEN Inc would like to lock in the rate it pays by entering into a forward rate agreement with Bank-ZQ. Bank-ZQ agrees to lock in a rate of 11 p ...continues