no1122

2）Sample 1 Afternoon Q78

Under which of the following conditions would a firm be least likely to issue variable-rate debt?

A. The yield curve is sloping sharply upward.

B. The yield curve is sloping sharply downward.

C. Operating cash flows are positively correlated with short-term interest rates.

D. Operating cash flows are negatively correlated with short-term interest rates.

OCFs r negatively correlated with S-T i/r: When S-T i/r increases, interest payment of variable-rate debt increases, AND ur OCF decrease...in such situations, u must pay more when u have less cash...

Of course A is also an unfavourable condition, but it does NOT mention what will happen to this partucular firm when i/r increase sharply. (maybe its revenue will also increase, and the additional profit can offset the extra interest payment)

3) Sample 2 Morning 111

Purchase one American put option chontract for $4 per option share; Owns 100 shares.

X=60, Stock price on the date of option purchase=60, stock price today=52,

Time to option expiry from today=1 Month.

Value of Put Option = $60-$52 = $8;

Profit from Put Option = $8-$4 = $4

Loss from Stock = $60-$52 = $8

Total Loss = ($8-$4)*100 = $400