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International Finance
ECO-M024
Time allowed: 1 hour 30 minutes
ANSWER ALL QUESTIONS
Notes are not permitted in this examination.
Calculators are permitted in this examination. Document Preview:

UNIVERSITY OF EAST ANGLIA School of Economics Mid-Semester Test: Sample Paper International Finance ECO-M024 Time allowed: 1 hour 30 minutes ANSWER ALL QUESTIONS Notes are not permitted in this examination. Calculators are permitted in this examination. Do not turn over until you are told to do so by the Invigilator. ECO-M024 Module Contact: Alasdair Brown Copyright of the University of East Anglia Version 1[Type text] [Type text]2 ECO-M024 Answer ALL of the following 4 questions. (Marks available in brackets). Question 1 (25 marks) Consider the following stocks, all of which pay a liquidating dividend in a year and nothing in the interim: Market Expected Capitalisation ($ Total Liquidating Return million) Dividend ($ million) Stock A 400 500 0.25 Stock B 0.333 375 500 Stock C 475 500 0.0526 Stock D 0.1111 450 500 Correlation –0.9984 a) Calculate the expected return of each stock. (15 marks) b) What is the sign of correlation between the expected return and market capitalization of the stocks? (10 marks) Question 2 (25 marks) ABC is currently trading for $25 per share. The stock pays no dividends. A one-year European put option on ABC with a strike price of $26 is currently trading for $1.50. If the risk-free interest rate is 5% per year, what is the price of a one-year European call option on ABC with a strike price of $26? Answer: Using put-call parity ?? 26?? = ?? + ?? – = 1.50 + 25 – = $1.74 (2. ?? . ?? . ) 1 + ?? 1.05 Question 3 (25 marks) a) The current price of stock A is £50. In the next year, this price will either go up by 10% or go down by 10%. The stock pays no dividends. The one-year risk-free interest rate is 6% and will remain constant. Using the Binomial Model, calculate the price of a one-year European call option on stock A with a strike price of £50. (15 Marks) b) Using the…

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