Fill This Form To Receive Instant Help

Help in Homework
trustpilot ratings
google ratings


Homework answers / question archive / 1)Explain why what the banks did during the Libor scandal was unethical?  2)Consider the following stocks Stock Initial Price (t-0) Final Price (t-1) Number of shares (in millions) A B 20 80 15 90 12 2 1- Calculate the initial price of a price-weighted index that comprises both stocks A and B

1)Explain why what the banks did during the Libor scandal was unethical?  2)Consider the following stocks Stock Initial Price (t-0) Final Price (t-1) Number of shares (in millions) A B 20 80 15 90 12 2 1- Calculate the initial price of a price-weighted index that comprises both stocks A and B

Finance

1)Explain why what the banks did during the Libor scandal was unethical? 

2)Consider the following stocks Stock Initial Price (t-0) Final Price (t-1) Number of shares (in millions) A B 20 80 15 90 12 2 1- Calculate the initial price of a price-weighted index that comprises both stocks A and B. 2- Calculate the final price of the same price-weighted index that comprises both stocks A and B. 3. Find the percentage change in the price-weighted average of the two stocks. 4- Calculate the final price of a market value weighted index that comprises A and B (assume that the initial price of the index is 100). Question 1 of 13 5- What is the percentage change of the value-weighted index? % Assume now that at t-0, stock B undergoes a 2 for 1 split (see new table below): Stock Initial Price (t-0) Final Price (t-1) Number of shares (in millions) A 20 40 15 45 12 4 B 6- What is the new divisor for the price-weighted index?
Assume now that at t=0, stock B undergoes a 2 for 1 split (see new table below): Stock Initial Price (t-0) Final Price (t-1) Number of shares in millions) ? 20 15 45 12 4 B 40 6- What is the new divisor for the price weighted index? n 1 of 13 7- Calculate the percentage change in the adjusted price-weighted index after the stock split. % 7. Calculate the percentage change in the value-weighted index after the stock split.

3)The annual risk free interest rate is 5.0625%. All stocks mentioned do not pay a dividend. All options mentioned are European style. The current spot price of Southwest Airlines (LUV) is 60.00. The forward price for a 6 month forward contract on Southwest Airlines is 61.50. You have the following premiums for European style calls on Southwest Airlines (LUV) which expire in 6 months: Strike Call Premium Put Premium 57 6.20 1.81 60 3.80 2.34 63 2.65 4.11

Create a payoff-profit table for Long Butterfly on LUV stock using call options. For the table, use spot prices in 6 months from 55 to 65 in increments of 1.

b. What is the maximum risk of this position?

c. What is the maximum reward of this position?

d. What is the up side breakeven spot price?

e. What is the down side breakeven spot price?

f. How would the payoff-profit table change if you used put options instead?

g. What would the cost of a Short Butterfly on LUV stock using call options be?

h. What would the cost of a Short Butterfly on LUV stock using put options be?

pur-new-sol

Purchase A New Answer

Custom new solution created by our subject matter experts

GET A QUOTE

Answer Preview

1)The Libor scandal was a series of fraudulent actions connected to the Libor (London Inter-bank Offered Rate) and also the resulting investigation and reaction. Libor is an average interest rate calculated through submissions of interest rates by major banks across the world. The scandal arose when it was discovered that banks were falsely inflating or deflating their rates so as to profit from trades, or to give the impression that they were more creditworthy than they were.

The reasons behind Libor scandal are as follows

1) The main reason of this scam was to earn money and manipulate the market

2) People involved in Libor scam manipulate submission interest to earn money.

Banks did following this under Libor Scandal

1) Banks falsely inflated interest rate to gain profit from traders

2) Banks deflated interest rate to gain profit from traders

3) Banks gave fake creditworthiness to its clients and customers

4) Banks manipulated US derivative market

5) Bank submitted false interest rate than then they are actually paying

6) Banks lacking confidence on current financial system

Yes , the Libor scandal was unethical , The scam was unethical can be understood with help of following ethics

1) Honesty : Banks should be honest with their customers and clients , but the were not honest .

2) Integrity : Integrity means following the norms issued by organization and keeping privacy .

3) Fairness : Every company/concern/organization should behave fairly with it's customer and clients , but the banks were not fair with its people .

4) Law abiding : Abiding law is also a part of ethics .Every company should follow law which prevailing in the country

5) Accountability : Having accountable to someone is also a part of ethics . Banks were accountable to its stakeholders .

Conclusion : As above mentioned are ethics for any concern there can be many ethics such as promise kipping , morale , respect for others , caring etc . it depends on individual and organisation .

2)

1 - initial price of a price-weighted index = (sum of initial prices of stocks)/no. of stocks

initial price of a price-weighted index = (20+80)/2 = 100/2 = 50

2 - final price of a price-weighted index = (sum of final prices of stocks)/no. of stocks

final price of a price-weighted index = (15+90)/2 = 105/2 = 52.5

3 - percentage change = (final price of a price-weighted index/initial price of a price-weighted index) - 1

percentage change = (52.5/50) - 1 = 1.05 - 1 = 0.05 or 5%

4 - final price of market value-weighted index = initial price of the index + sum of (final price of stock*no. of shares)/no. of shares

final price of market value-weighted index = 100 + [(15*12) + (90*2)]/(12+2) = 100 + [(180+180)/14] = 100 + (360/14 ) = 100 + 25.71 = 125.71

3)

Butterfly Using Call

Buy one Call Option at Strike Price of 57 , Premium Payable = 6.20

Buy one Call Option at Strike Price of 63 , Premium Payable = 2.65

Sell Two Call Option at Strike Price of 60 , Premium Receivable = 2 x 3.80 = 7.60

Net Premium Payable = 6.20 + 2.65 - 7.60 = 1.25

(a) Payoff-Profit table for Long Butterfly on LUV stock using call options

Spot Price After 6 Months Value of Call @ 57 Value of Call @ 63 Value of Two Calls @ 60 Position on Expiry Net Premium Paid Net Profit/ (Loss)
55 0 0 0 0 1.25 -1.25
56 0 0 0 0 1.25 -1.25
57 0 0 0 0 1.25 -1.25
58 1 0 0 1 1.25 -0.25
59 2 0 0 2 1.25 0.75
60 3 0 0 3 1.25 1.75
61 4 0 2 2 1.25 0.75
62 5 0 4 1 1.25 -0.25
63 6 0 6 0 1.25 -1.25
64 7 1 8 0 1.25 -1.25
65 8 2 10 0 1.25 -1.25

(b) Maximum risk of this position = Premium Payable = 1.25

(c) Maximum reward of this position

= Strike Price of Call Sold - Strike Price of Call (with Lowest Strike Price) - Premium Paid

= 60 - 57 - 1.25 = 1.75

(d) Up side breakeven spot price

= Strike Price of Call (with Highest Strike Price) - Premium Payable

= 63 - 1.25 = 61.75

(e) Down side breakeven spot price

= Strike Price of Call (with Lowest Strike Price) + Premium Payable

= 57 + 1.25 = 58.25

(f)

Butterfly Using Put

Buy one Put Option at Strike Price of 57 , Premium Payable = 1.81

Buy one Put Option at Strike Price of 63 , Premium Payable = 4.11

Sell Two Put Option at Strike Price of 60 , Premium Receivable = 2 x 2.34 = 4.68

Net Premium Receivable = 1.81 + 4.11 - 4.68 = 1.24

New Payoff Profit Table

Spot Price After 6 Months Value of Put @ 57 Value of Put @ 63 Value of Two Puts @ 60 Position on Expiry Net Premium Paid Net Profit/ (Loss)
55 2 8 10 0 1.24 -1.24
56 1 7 8 0 1.24 -1.24
57 0 6 6 0 1.24 -1.24
58 0 5 4 1 1.24 -0.24
59 0 4 2 2 1.24 0.76
60 0 3 0 3 1.24 1.76
61 0 2 0 2 1.24 0.76
62 0 1 0 1 1.24 -0.24
63 0 0 0 0 1.24 -1.24
64 0 0 0 0 1.24 -1.24
65 0 0 0 0 1.24 -1.24

(g) Cost of Short Butterly by Call = Maximum Loss on Expiry

= 1.75

Maximum Profit = Premium Receivable = 1.25

(g) Cost of Short Butterly by Put = Maximum Loss on Expiry

= 1.76

Maximum Profit = Premium Receivable = 1.24