FINANCIAL ECONOMICS - FINAL EXAM - May 2013

OPTION A
NAME AND SURNAME…………………………………………………………………………………………..
GROUP ……………………………………………………………..
DEGREE……………………………………………………………………………………………………………

RULES:
A- Each question adds up to one point. 0.33 points are subtracted for each incorrect
answer. You will get zero points for each unanswered question.
B- There is just one correct answer per question.
C- Provide the answers in the answer-sheet.
D- All calculations must be done in the exam sheet. You must hand in everything (exam
and calculations) at the end of the exam.
E- Mobile phones are not allowed.
F- Exam duration: 120min.

1. Mark the correct answer:

a. The payoff of a long position in a forward contract on Apple with exercise price
400 at time T can be replicated with a portfolio consisting on a long position in a
share of Apple and a short position in a zero coupon bond with maturity T and face
value 400.
b. The payoff of a long position in a forward contract on Apple with exercise price
400 at time T can be replicated by a portfolio consisting of a long position in the
stock of Apple and a long position in a zero coupon bond with maturity T and face
value 400.
c. The payoff on a long position of a forward contract on Apple with exercise price
400 at time T can be replicated with a portfolio consisting on a long position in a
call option on Apple´s share with maturity T and exercise price 400, and a short
position on a put option on Apple´s share with maturity T and exercise price 400.
d. a and c are correct.

2. The stocks of Google are trading at $700. The quoted price of a zero coupon bond issued
by the US treasury with maturity 3 months and face value $1000 is $999. The exercise
price (K) of a forward contract with 3 months maturity written on a Google stock at the
initiation date of the contract is,
a. 710,05 euros
b. 698,00 euros
c. 700,18 euros
d. None of the above.

3. The following graph shows,

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 a. The payoffs at maturity generated by a long position in a call option with strike (E=
120), and a short position in a put option on the same underlying, with equal maturity
and strike price 120 (E= 120).
b. The payoffs at maturity T generated by a long position on a zero-coupon bond with
face value 100, and a long position in a forward on a stock with maturity T
and exercise price 100.
c. The payoffs at maturity T generated by buying a call option and a put option on the
same underlying, with equal maturity and the same strike price (E= 100).
d. The payoffs at maturity T generated by a long position on a zero-coupon bond with
face value 100 and a long position on a call option with strike price 100 (E=100) and
maturity T.

4. The manager of American Airlines is worried about a possible rise in the crude oil price.
Under these circumstances, the operational costs of the firm would increase significantly.
What strategy with options should American Airlines follow in order to be hedged against
this possibility?
a. Buy crude oil call options.
b. Buy crude oil put options.
c. Sell crude oil call options.
d. Sell crude oil future contracts.

5. According to the CAPM, if the beta of Apple´s stock is equal to 1, then

a. On average, the returns generated by Apple must replicate those generated by the
S&P500 index.
b. Apple´s stock replicates the returns of a perfectly diversified portfolio, also known
as the market portfolio.
c. The idiosyncratic risk of Apple´s stock is high.
d. a and b are correct.

6. The S&P500 index gives an expected return of 12%. The risk-free rate is 1%, and the beta
of Apple´s stock has a beta coefficient equal to 1. At the same time, the stock of Apple is
trading in the market with an expected return of 10%. Under the CAPM framework, this
implies,
a. Apple´s stock is overvaluated. There are arbitrage opportunities.
b. Apple´s stock is undervaluated. There exist arbitrage opportunities.
c. Apple´s stock is correctly priced. There are not arbitrage opportunities.
d. It is impossible to answer. We need more data.

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7. An investor holds a portfolio made of two assets, assets A and B. The beta of asset A is 0.7
and the beta of asset B is 1.5. The investor wants to build a portfolio with a beta equal to
0.3. What weight should be allocated to asset A to construct the desired portfolio?
a. -0.5
b. 0.9
c. 1.5
d. -1.1

8. Once the desired portfolio with beta 0.3 is constructed, the investor decides to invest 50%
of her wealth in cash, and the remainder 50% in the portfolio. What is the final beta of her
investment?
a. 0.15
b. 1.30
c. 1.00
d. 0.45

9. A portfolio manager can invest in two shares (Telefónica and Repsol), whose expected
returns are -10% and 25%, respectively. Additionally, their standard deviations are 40%
and 27%, respectively. What are the weights that should be invested in each of these
assets if the aim is to obtain the minimum variance portfolio?
a. WTEL = -2.08 and WREP = 3.07, if the correlation coefficient between Telefónica and
Repsol is 1, and short selling is allowed.
b. WTEL = 0.4 and WREP = 0.6, if the correlation coefficient between Telefónica and
Repsol is -1, and short selling is allowed.
c. WTEL = 2.08 and WREP = 3.07, if the correlation coefficient between Telefónica and
Repsol is 1, and short selling it is allowed.
d. a and b are correct.

10. Assume that the correlation coefficient between Telefónica and Repsol is equal to 0, given
the data in the previous exercise, the expected return and volatility of an equally weighted
portfolio made of Telefónica and Repsol, are:
a. Return and volatility 5.00% and 15.00%, respectively.
b. Return and volatility 7.50% and 24.13%, respectively.
c. Return and volatility -1.15% and 30.47%, respectively.
d. Return and volatility 8.03% and 22.79%, respectively.

11. An investor wants to invest in the risk-free asset “rf” and a risky asset “i”. Assuming the
return of the risk-free asset is rf=5%, and given the following data,

Asset 1 2 3 4
E[Ri] 15% 20% 16% 13%
σi 40% 50% 30% 15%

On the basis of the generated Capital Allocation line (CAL) for each of the risky assets,
determine the investor´s optimal choice. Invest in the:
a. Risk-free asset and the first risky asset, which generates the CAL E[Rp]= rf+0.38σp
b. Risk-free asset and the second risky asset, which generates the CAL E[Rp]= rf+0.40σp

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 c. Risk-free asset and the third risky asset, which generates the CAL E[Rp]= rf+0.37σp
d. Risk-free asset and the forth risky asset, which generates the CAL [ERp]= rf+0.53σp

12. When pursuing the strategy of short selling:

a. An investor sells a stock that she does not own, so that she has to buy back the
share at the new traded market price when the position is closed.
b. Allows the investor to benefit from a drop in the stock price.
c. Allows the investor to benefit from an increase in the stock price.
d. a and b are correct

13. The monthly composed interest rate equivalent to the quarterly interest rate 3,93% is:
a. 0,84%
b. 1,29%
c. 1,57%
d. 1,64%

14. Imagine you inherit 50.000 euros. Assuming that the annual cost of capital is 3%, what would you
prefer?
a. A payment of 50.000 euros today.
b. 10 annualities of 5.000 euros, starting the payments in one year.
c. A unique payment of 55.000 euros in 3 years.
d. 30 semi-annual payments of 1.200 euros. The first payment is in the next six months.

15. Determine the NPV of this project with the following cash-flows assuming that the annual
cost of capital is 12%.
t=0 Year 1 Year 2 Year 3
-500 +350 +200 +200
a. NPV between 120€ and 130€
b. NPV between -15 € and -5€
c. NPV between 110€ and 115€.
d. None of the above.

16. Given the following cashflows, under which range of discount rates would you accept the
project?

t=0 Year 1 Year 2

-200,00 +300,00 -82,08

a. Discount rates between 18,50% and 19,84%.

b. Discount rates between 12,50% and 13,50%.
c. Discount rates higher than 17,40%.
d. None of the above.

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17. Given the following term structure of interest rates,

Maturity 1 2 3 4 5
(years)
Spot 3,5% 4,5% 5,0% 5,4% 5,75%
interest rate

Compute the forward interest rate from year t=1 to year t=3 (0f1,3), and the forward interest rate from
year t=4 to year t=5 (0f4,5), respectively,
a. 0f1,3=5.76%; 0f4,5= 7.16%
b. 0f1,3= 5.00%; 0f4,5= 6.54%
c. 0f1,3= 4.54%; 0f4,5= 9.32%
d. None of the above.

18. Compute the price of zero-coupon bond issued by the Spanish Treasury, with maturity 1 year, face
value 1000 euros and repayment value at par. The credit rating of the bond is BBB, implying that
this bond pays a spread of 300 basis points (1 basis point = 0.01%) over the risk-free rate. Assume
that the (annual) risk-free rate is 1%.
a. The price of the bond is 978.39 euros.
b. The price of the bond is 961.54 euros.
c. The price of the bond is 1001.23 euros.
d. The price of the bond is 990.10 euros.

19. Mark the incorrect answer:

a. The interest rate risk refers to the possibility that the value of a portfolio of fixed income
products (or just one asset) decreases with an increase of the market interest rates.
b. The lower the interest rate, the higher the price of a bond.
c. The higher the credit rating of a firm, the higher the interest rate paid for its debt.
d. Default risk of a bond refers to the possibility that the issuer of a given bond does not fulfill
his obligations (future payments).

20. An analyst estimates that today (t=0) the benefits per share of the firm CICISA will be 40€ in the first
year (t=1), and 50€ in the second year (t=2). He predicts that after the second year benefits will
grow at 2% in perpetuity. Historically, the pay-out of this firm has been 55%, and it is not assumed
to change in the future. What should be the market price of these stocks? Assume that the cost of
capital is 9% for this type of firms.

a. The price will be 125.30 euros.

b. The price will be 350.84 euros.
c. The price will be 380.60 euros
d. None of the above.