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Finance Questions: Billick Brothers is estimating its WACC, U.S. / Swiss exchange rates, and more...

A.-The maximum loss is limited to the strike price of the underlying asset less the premium.
b.-The gain or loss is equal to but of the opposite sign of the buyer of a put option.
c.-The maximum gain is the amount of the premium. (correct)
d.-All of the above are true.

A call option on euros is written with a strike price of $1.30/â?¬. Which spot price maximizes your profit if you choose to exercise the option before maturity?
Answer Choices
a. $1.20/â?¬
b. $1.25/â?¬
c. $1.30/â?¬
d. $1.35/â?¬ (correct)

Which of the following is the most likely strategy for a U.S. firm that will be receiving Swiss francs in the future and desires to avoid exchange rate risk (assume the firm has no offsetting position in francs)?

a.- purchase a call option on francs.
b.- sell a futures contract on francs.
c.- obtain a forward contract to purchase francs forward (correct)
d.-all of the above are appropriate strategies for the scenario described.

Losses from __________ exposure generally reduce taxable income in the year they are realized. __________ exposure losses are not cash losses and therefore, are not tax deductible.

a.- transaction; Operating
b.- accounting; Operating
c.- accounting; Transaction
d.- transaction; Accounting

Billick Brothers is estimating its WACC. The company has collected the following information: Its capital structure consists of 40 percent debt and 60 percent equity
; the company has 20-year bonds outstanding with a 9 percen annyal coupon that are trading at par, the company's tax rate is 40 percent; the risk-free is 5.5 percent; the market risk premium is 5 percent. the stock's beta is 1.4. What is the company's WACC?
a) 9.71
B) 9.66
c) 8.31
d)11.18
e)11.10

Solution Preview

I got the answers for these questions, however i cannot understand why these are the correct answers

Which of the following is NOT true for the writer of a put option?

a.-The maximum loss is limited to the strike price of the underlying asset less the premium.
b.-The gain or loss is equal to but of the opposite sign of the buyer of a put option.
c.-The maximum gain is the amount of the premium. (correct)
d.-All of the above are true.
If the option writer has a covered put, then he will short-sell the stock. On the day as the put option is not exercised, he will buy the stock from the market and clear the short position, So his total gain will be the
Premium + (stock price when option expires - Stock price when option was written)
So his maximum gain could be more or less than the premium.
However when the option is written ...

Solution Summary

You will find the answer to this puzzling question inside...

$2.19