Exam 3: Arbitrage and Financial Decision Making

Use the information for the question(s) below. As an oil refiner, you are able to produce $76 worth of unleaded gasoline from one barrel of Alaska North Slope (ANS) crude oil. Because of its lower sulfur content, you can produce $77 worth of unleaded gasoline from one barrel of West Texas Intermediate (WTI) crude. -Another oil refiner is offering to trade you 10,150 Bbls of Alaska North Slope (ANS)crude oil for 10,000 Bbls of West Texas Intermediate (WTI)crude oil.Assuming you just purchased 10,000 Bbls of WTI crude at the current market price,the total benefit (cost)to you if you take the trade is closest to:

Use the table for the question(s) below. -Consider a bond that pays $1,000 in one year.Suppose that the market interest rate for savings is 8%,but the interest rate for borrowing is 10%.The price range that this bond must trade in a normal market if no arbitrage opportunities exist is closest to:

Use the information for the question(s) below. An independent Canadian film maker is considering producing a new movie. The initial cost for making this movie will be $20 million today. Once the movie is completed, in one year, the movie will be sold to a major studio for $25 million. Rather than paying the $20 million investment entirely using its own cash, the film maker is considering raising additional funds by issuing a security that will pay investors $11 million in one year. Suppose the risk-free rate of interest is 10%. -Assuming that the film maker issues the new security,the NPV for this project is closest to what amount? Should the film maker make the investment?

Use the table for the question(s) below. -If the risk-free interest rate is 10%,then of the four projects listed,which project would you never want to invest in?

Suppose that Bondi Inc.is a Canadian holding company that owns both Pizza Hut and Kentucky Fried Chicken Franchised Restaurants.If the value of Bondi is $130 million,and the Pizza Hut Franchises are worth $70 million,then what is the value of the Kentucky Fried Chicken Franchises?

Which of the following statements regarding the valuing of costs and benefits is NOT correct?

Use the table for the question(s) below. -If the value of security "C" is $180,then what must be the value of security "A"?

Advanced Micro Devices (NYSE: AMD)is currently trading at $20.75 on the NYSE.Advanced Micro Devices is also listed on NASDAQ and assume it is currently trading on NASDAQ at $20.50.Does an arbitrage opportunity exist and if so how would you exploit it and how much would you make on a block trade of 1,000 shares?

Use the information for the question(s) below. Coloma Cooper Incorporated is able to produce $640 worth of copper from one ton of low-grade copper ore. Because of its higher copper content, Coloma can produce $940 worth of copper from one ton of high-grade copper ore. -A company that manufactures copper piping is offering to trade you 5,925 tons of low-grade copper ore for 4,000 tons of high-grade copper ore.Assuming you currently have 4,000 tons of high-grade ore,what are the total benefits and added benefits of taking the trade?

Use the information for the question(s) below. As an oil refiner, you are able to produce $76 worth of unleaded gasoline from one barrel of Alaska North Slope (ANS) crude oil. Because of its lower sulfur content, you can produce $77 worth of unleaded gasoline from one barrel of West Texas Intermediate (WTI) crude. -Assuming you just purchased 10,000 Bbls of WTI crude at the current market price,the total benefit (cost)to you if you were to refine this crude oil and sell the unleaded gasoline is closest to:

Use the table for the question(s) below. -Suppose a risky security pays an average cash flow of $100 in one year.The risk-free rate is 5%,and the expected return on the market index is 13%.If the returns on this security are high when the economy is strong and low when the economy is weak,but the returns vary by only half as much as the market index,what risk premium is appropriate for this security?

Use the table for the question(s) below. -What is the no-arbitrage price for security C?

Which of the following statements is correct?

Use the information for the question(s) below. As an oil refiner, you are able to produce $76 worth of unleaded gasoline from one barrel of Alaska North Slope (ANS) crude oil. Because of its lower sulfur content, you can produce $77 worth of unleaded gasoline from one barrel of West Texas Intermediate (WTI) crude. -Assuming you currently have 10,000 Bbls of WTI crude,the added benefit (cost)to you if you were to sell the 10,000 Bbls of WTI crude and use the proceeds to purchase and refine ANS crude is closest to:

You have an investment opportunity in Germany that requires an investment of $250,000 today and will produce a cash flow of €208,650 in one year with no risk.Suppose the risk-free rate of interest in Germany is 7% and the current competitive exchange rate is €0.78 to $1.00.What is the NPV of this project? Would you take the project?

Use the information for the question(s) below. As an oil refiner, you are able to produce $76 worth of unleaded gasoline from one barrel of Alaska North Slope (ANS) crude oil. Because of its lower sulfur content, you can produce $77 worth of unleaded gasoline from one barrel of West Texas Intermediate (WTI) crude. -Another oil refiner is offering to trade you 10,150 Bbls of Alaska North Slope (ANS)crude oil for 10,000 Bbls of West Texas Intermediate (WTI)crude oil.Assuming you currently have 10,000 Bbls of WTI crude,what should you do?

Which of the following statements regarding Net Present Value (NPV)is incorrect?

Use the table for the question(s) below. -If the risk-free interest rate is 10%,then of the four projects listed,if could only invest in two of these projects,which two projects would you select?

Use the information for the question(s) below. Coloma Cooper Incorporated is able to produce $640 worth of copper from one ton of low-grade copper ore. Because of its higher copper content, Coloma can produce $940 worth of copper from one ton of high-grade copper ore. -A mining company is offering to trade you 7,250 tons of low-grade copper ore for 5,000 tons of high-grade copper ore.Assuming you currently have 5,000 tons of high-grade ore,what should you do?

Use the table for the question(s) below. -Assume that the risk-free interest rate is 10%.Rank each of the four projects from most desirable to least desirable based upon NPV.Which project would you invest in first? Are there any projects that you wouldn't invest in?