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New Economics & Option Strategy

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1. Use a diagram to explain the "new economics" proposition of monetary policy effectiveness. Describe the underlying assumptions of the new economics model. What is the policy ineffectiveness proposition?

2. Use the figure attached...

a. to demonstrate the gains and losses to a short put and a long put on dollars with identical maturity dates, where the strike price is 0.50DM/$1, and the option premiums are identical at 0.05DM. Is there a net gain to short and long puts in this example? Why or why not?

b. Will a short put be exercised if the market price at maturity is greater than the strike price? Why or why not? Will a long call be exercised if the market price at maturity is lower than the strike price? Why or why not? Use properly labelled diagrams to support your answers. Assume that the strike price on each option is 4.2DM/$1, and that the option premiums are identical at 1.1DM/$1.

c. Explain the motives of both the seller and buyer of a straddle. Use properly labelled diagrams to support your explanation. Assume that the strike prices are 0.50DM/$1, that the option premiumon the call is 0.05DM/$1, and that the option premium on the put is 0.035 DM/$1.

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Solution Summary

Word attachment explains the new economics of monetary policy effectiveness and its assumptions.

See Also This Related BrainMass Solution

Budget for a new international restaurant

Our team has a global venture project of opening up a restaurant in Hong Kong with a California cuisine. (Please see attachments for details).

We desperately need a budget for this restaurant. Please see attached excel spreadsheet as a guide.

Here are the instructions:

Prepare a budget and financial overview for your global venture. Prepare a financial analysis in terms of currency risk management and financing of your global operation. Discuss what financial institutions and instruments you would use to achieve your global expansion.

Use the Capital Budgeting Microsoft Excel Template to complete the analysis (see excel attachment)

As a minimum, apply the following capital budgeting techniques to assess the financial viability of your project

o Net Present Value (NPV)
o Internal Rate of Return (IRR)
o PB
o You may use the data provided in the Capital Budgeting MS
Excel Template as the basis for your analysis (recommended) or you may
enter your own specific data to make the analysis more real life.
o Identify potential domestic and international sources of financing to the organization

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