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1
1.Sally Prescott plans on retiring in 15 years, that is, she will work for another 15 full years. When she retires she plans on spending 3 years in Bulgaria volunteering for the Peace Corps. After which she will spend her time in Boca Raton, Florida at a townhouse she purchased 5 years ago for $250,000. She currently has $100,000 in savings. She estimates that she will need $20,000 a year for living expenses in Bulgaria and then $35,000 a year for approximately 20 years when she retires to Florida. If she earns 4% compounded monthly in her savings account, how much must she deposit each year to meet her financial goals? She will withdraw her annual cash flows at the beginning of each year, that is, her first $20,000 withdrawal will occur at the beginning of year 16, before she travels to Bulgaria. Her annual deposits will begin at the end of this year and continue until she leaves for Bulgaria.
2., Matt Shorted 200 shares of pirate stock at $20 per share at an initial margin of 80 percent in his new account; the stock has since increased and closed at $25 per share today. Assuming matt has no other positions and has added no other cash, how much cash does he have.
3.A. When is the best time to exercise the call option and put option strategy? Justify.
B. What is risk-neutral valuation? Expound.
4.Bate industries has a quick ratio of 1.3, net profit margin of 6%, inventory turnover of 2.8, total asset turnover of 1.5, accounts turnover of 2.2, a debt to equity ratio of 1.1 and its PE ratio if 18. Compute ROE
Expert Solution
1.The first step is to find the size of the retirement fund.
The savings account earns 4% compounded monthly, The effective annual rate is found as follows.
Size of retirement fund = $ 57684.1 + $ 436474.5674 = $ 494158.66
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To reach the financial goal, the deposit to be made each year is found as follows.
Solving for A in the above equation
$ 494,158.66 = $ 181,921.2 + A 
20.13
A 20.13 = $ 494,158.66 - $ 181,921.2
A 20.13 = $ 312,237.46
Annual deposit to be made = $ 15,511.1 
$ 15,511
PFA
2.CASH LEFT = $2,200
SHORT POSITION COST = 200 x 20 = 4,000
INITIAL MARGIN REQUIREMENT = 80% x 4000 = 3200
CURRENT MTM = (20-25) x 200 = -1000
CASH LEFT = INITIAL MARGIN + CURRENT MTM
= 3200 + (-1000)
= $2,200
3. A)
When you sell an option, the most you can profit is the price of the premium collected, but often there is unlimited downside potential. When you purchase an option, your upside can be unlimited and the most you can lose is the cost of the options premium.
A call option buyer stands to make a profit if the underlying asset, let's say a stock, rises above the strike price before expiry. A put option buyer makes a profit if the price falls below the strike price before the expiration. The exact amount of profit depends on the difference between the stock price and the option strike price at expiration or when the option position is closed.
B)
It is a method for valuing financial assets. Risk-neutral valuation calculates the value of an asset by discounting the expected value of its future pay-offs at the risk-free rate of return. The expected value is not obtained using the actual probabilities of each pay-off. Instead, risk-neutral valuation calculates the expected value of future pay-offs using constructed probabilities that have the property of rationalizing observed asset prices if all investors were risk-neutral.
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