Using arbitrage arguments explain why the price of an American call option on a stock paying no dividends should be the same as the price of a corresponding European call. Why when the stock pays dividends the above argument can not be used. Give a numerical example (choosing x, k, r, T −t, σ) in which it is obvious (without any formulas) that American put price on a nondividend paying stock is larger then the corresponding European put price.

• The notion that actual capital markets, such as the TSX, are fairly priced is called the:

I’m preparing for Deferred Tax Worksheet. What is “Deductible Amount”?

Question 1

You are the finance partner of PapTMako Inc, a construction firm. Your firm needs additional funds to finance a planned expansion program to be implemented in 5 years time. You are considering setting up a sinking fund to raise GH¢200000 in five years. You were able to negotiate for an interest rate of 20% per annum. Equal amount of payments the sinking fund to be made at the end of each of the next five (5) years.

Required:

Determine the equal amount of payments to be made at the end of each year.

Question 2

Yahya needs at least GH¢3000 in 5 to start a small business. He is considering saving from now to get the required minimum start-up capital. He has the following two savings options:

Option 1

He can deposit an amount of GH¢1500 in a time deposit account for 5 years. This account attracts interest of 20% per annum. Interest is compounded semi-annually.

Option 2

He can deposit GH¢350 into a sinking fund at the end of each year for 5 years. The fund attracts compound interest at 25% per annum.

Required:

(a)  Find the future value of all the payments under each of the two options.             

(b)  Which of the options would help him to obtain the maximum amount to start the business?          

(c)  How much should he contribute at the end of each year for the next five years so as to earn at least GH¢3000 from the sinking fund under Option 2?

WASHINGTON: The US economy contracted at the fastest pace since 1982, a 3.8 percent rate of decline. The decline in fourth-quarter gross domestic product (GDP) as estimated by the Commerce Department marked a sharp downward acceleration in economic activity after a 0.5 percent drop in the third quarter. Christina Romer, chair of President Barack Obama’s Council of Economic Advisors, warned the recession had spread to all sectors of the economy and highlights the need for a quick stimulus plan. “This widespread decline emphasizes that the problems that began in our housing and financial sector have spread to nearly all areas of the economy,” Romer said in a statement.

By how much did annualized consumption decline in November of 2008 when GDP was $14 trillion?