bump
basic formula: C + x-f/1+r = P if f>x, x-f/1+r is NEGATIVE to start (short) so reaarranging bond to other side to price call, c = x-f/1+r + p; or a long bond make sense?
Smarshy Wrote: ------------------------------------------------------- > Someone please take pity on me and explain this > answer to me. > > You are going to create synthetic European call > option with a strike price of .84 by using: > 1) a long position in a put option with same > strike price > 2) a position in a 90 day forward contract (the > price of the forward will be higher than the .84 > strike price > 3) a position in a zero coupon bond that matures > in 90 days > > The positions that should be used for forward and > the bnd are: > > Forward: Short or long? > Bond: Short or long? > > I just can’t get this. I think long on forward and short on bond for me the idea is the same as a regular syntethic parity just that the price of the stock is replaced with the current value of the forward price so if you want to recreate a call that means that you need to be long on a put, long on the present value of the forward price(that is long on the forward contract) and short on the bond. Now if we are talking about an arbitrage posibility you need to compare the two sides of the parity. So I really think it’s a matter of treat differently recreating a syntethic position and what position we should take if there is an arbitrage opportunity
What about question 58? Why doesnt Sevilla have any liquidity needs when he/she is planning on contributing $100k to charitable contributions every year? Damn it, I wish it was like in college where you could talk to the professor after a review of the test and make a case for your answer
^^ agreed… i put liquidity as significant as well…considering the dude’ income was like 340,000 and he needed to spend 100,000 - that’s freaking 1/3rd… their justification was - it was not needed immediately…which I think is BS…
he wanted to spend that 100,000 from his INVESTMENT acct. which is a unique circumstance. the 340,000 annual income (besides his 80 mio in assets) are his for his leisure time. that;s why no liquidity requirements… but significant unique circumstances.
Also, for question 23… I dont quite remember this one but essentially it asks to evaluate the effect on asset turnover and return on equity ratios if you as an analyst add back the LIFO reserve. If somebody has a better memory, please help me out here… Anyhow, I thought that you should add back the LIFO reserve to both assets AND equity? If so, the ROE ration would decrease? They are saying it would increase because you’re increasing both the numerator and denominator by the same amount and the NI is less than Equity. That makes sense, only if you’re not adding back the LIFO reserve to Equity. Also, if you’re not adding back Equity then A = L + E doesnt hold so I dont know what they are doing here. Maybe I just didnt get the question?
Barthezz: Oh, totally missed that. Thanks, that would explain it
tom18606, one minor change will make your explanation easier to understand: The formula is C0+X-F(T)/(1+r)t=P0, which shows the price to create this portfolio. The actual portfolio is C0+X-FT/(1+r)t=P0 + f(T). The reason the term f(T) is not added in the above is that we don’t pay anything to enter into a forward contract. f(T) is the VALUE of the forward contract which is zero coz at the beginning of the contract it is worthless.
over05, So I believe this is the final formula: C0=P0+F(T)-(X-F(T))/(1+R)T But what to with this F(T) > X and the bond being “X-F(T)” condition? Can you help me? Thx !
avnx, read page 205-207, don’t get bogged down to long or short. The whole logic is based on arbitrage (same payoff must be same value today). And you will see the logic to decide whether it is long or short bond.
so is the answer long forward short bond?..i don’t think the answer was psoted?
this question is nasty. And it is just tricky. I don’t think it’s a good question. It have not checked the relevance knowledge. If it is changed to put: Short or long? Bond: Short or long? any one got what i mean
lafricana Wrote: ------------------------------------------------------- > aeolusloo Wrote: > -------------------------------------------------- > ----- > > from c+(x-F)/(1+r)=p, u know the bond is x-F, > not > > x > > > insightful! > Many thanks! I am thought it in a exact same way. I don’t think it’s a good question
Good or bad, it showed up on a CFA mock. I hope there’s a 5th choice: e) Skip because it’s a bad question