Chapter 1: Question 2-28I (page 52)
Why do call options with exercise prices higher than the price of the underlying stock sell for positive prices?
Call options that have the exercise price higher than the underlying stock are more attractive for potential buyers because there is a chance to earn higher profits.
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How do security dealers earn their profits?
What reforms to the financial system might reduce its exposure to systemic risk?
Find the after-tax return to a corporation that buys a share of preferred stock at \(40, sells it at year-end at \)40, and receives a $4 year-end dividend. The firm is in the 30% tax bracket.
Consider the following limit order book for a share of stock. The last trade in the stock occurred at a price of $50.
a. If a market buy order for 100 shares comes in, at what price will it be filled?
b. At what price would the next market buy order be filled?
c. If you were a security dealer, would you want to increase or decrease your inventory of this stock?
Suppose you observe the investment performance of 350 portfolio managers for five years and rank them by investment returns during each year. After five years, you find that 11 of the funds have investment returns that place the fund in the top half of the sample in each and every year of your sample. Such consistency of performance indicates to you that these must be the funds whose managers are in fact skilled, and you invest your money in these funds. Is your conclusion warranted?
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