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Author Question: Money-market hedges and forward-market hedges rely on the A) law of large numbers. B) purchasing ... (Read 31 times)

vicotolentino

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on: Jul 10, 2018
Money-market hedges and forward-market hedges rely on the
 
  A) law of large numbers. B) purchasing power parity theory.
  C) capital asset pricing model. D) interest rate parity theory.

Question 2

You are presented with two cash flow options: Option Near, a 5,000 annuity for three years, with the first cash flow one year from today, or Option Far, a 5,000 annuity for six years with the first cash flow ten years from today.
 
  Assuming an interest rate of 7.0, which set of cash flows has a greater present value?
  A) Option Near has a greater PV of 13,121.58 vs. Option Far PV of 12,963.41.
  B) Option Far has a greater PV of 13,121.58 vs. Option Near PV of 12,963.41.
  C) Option Far has a greater PV of 30,000 vs. Option Near PV of 15,000.
  D) Option Near and Option Far have the same PV of 12,963.41.


frankwu0507

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Reply #1 on: Jul 10, 2018
Answer to Question 1

D

Answer to Question 2

Answer: A
Explanation: A) Although this problem is not directly addressed in the text, its intended effect is to reinforce the idea of present value. In this kind of problem, the student must find a present value in the future, and then discount that renamed future value back to the present value at time zero.
Option Near: PV = PMT  = 5,000  = 13,121.58.
Option Far: PV = PMT  / (1 + r)n = 5,000  / (1.07)9 = 12,963.41.


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