Jul 26, 2017

What is a “naked” call? Is it high risk?

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Finance Project: An Excel file with your data and calculations. Reports and complete references

INSTRUCTIONS:

Introduction: This project is broken into 4 parts. For each, create: 1. An Excel file with your data and calculations. 2. A Word file with the reports and complete references. Attachments are limited to the maximum of two files: Word (doc. or docx.), Excel, or Plain text formats. Add tabs to your spreadsheet for each project part, and append to the single Word doc for your narrative. Submit one file in Excel with your data and calculations, and one file in Word format with your report. If you do not have a copy of this Microsoft Office software, use a free document or spreadsheet product from Google and save the files in the respective Office formats. Project Part 1 (20%) Based on course material presented in chapter 4 Initial Public Offering For this part of the project, go to the web site http://www.hoovers.com/free. Scroll down. On the left side of the page, select “IPO Central.” On the left of the page, go to the section “IPO Scorecard.” Write a report (2 pages double spaced). In this essay address the following: 1. How many IPOs were there in the most recent quarter? What is the average value of equity raised in each IPO? Did this seem like a “hot” quarter or a “cold” quarter in terms of IPO activity relative to past quarters? 2. Which IPO had the best return during the quarter? Which had the worst? 3. Which IPO had the biggest first-day return? Which had the biggest first-day loss? 4. What are the advantages of an IPO? 5. What are the disadvantages of an IPO? So why doesn`t everybody go public? 6. Give an example of an initial public offering (IPO) in the primary market. Give an example of seasoned equity issue in the primary market. Discuss which would involve greater risk to the buyer. Project Part 2 (35%) Based on the course material presented in chapter 5 Create and Evaluate Stock Indexes I. COLLECT THE FOLLOWING DATA FOR FIVE BUSINESS DAYS: Go to www.cnn.money.com or another financial site. 1. Collect the price (use the previous day`s Close price) and number of shares outstanding data for five consecutive business days on the following publicly traded companies. • International Business Machines Corp. (IBM) • Infosys Technologies Ltd (INFY) • Computer Sciences Corp (CSC) • SAIC Inc (SAI) • Cognizant Technology Solutions (CTSH) 2. Collect the Dow Jones Industrial Average (symbol INDU) at closing for the same five consecutive business days. 3. Collect the S&P 500 (SPX) at closing for the same five consecutive business days. 4. Collect the NASDAQ Composite Index (symbol NASDAQ) at closing for the same five consecutive business days. Present all this information in your report as a table. II – CREATE AND EVALUATE STOCK INDEXES Using the prices (use Previous Day`s Close price) and number of shares outstanding data for five consecutive business days on five companies that you collected, create and evaluate stock indexes. 1. a) create an “IT solutions value-weighted index” for EACH of 5 days. b) Calculate percentage change of this index to the previous day for each of the 5 days. c) Calculate overall percentage change for the 5 days. Present these results in your project. 2. a) compute an “IT solutions price-weighted index” for EACH of 5 days. b) Calculate percentage change of the index to the previous day for each of 5 days. c) Calculate overall percentage change for 5 days. Present these results in your project. 3. a) compute an “IT solutions unweighted stock index” for EACH of 5 days. b) Calculate percentage change of the index to the previous day for each of 5 days. c) Calculate overall percentage change for 5 days. Present these results in your project. 4. Using the prices (use Previous Day`s Close price) and number of shares outstanding on day 1, compute the relative weight for each of the five stocks. Present these results in your project. Which stock has the largest weight and which stock has the smallest weight? 5. Calculate percentage change of the Dow Jones Industrial Average to the previous day for each of 5 days. Calculate overall percentage change for 5 days. 6. Calculate percentage change of the S&P 500 to the previous day for each of 10 days. Calculate overall percentage change for 5 days. 7. Calculate percentage change of the NASDAQ Composite to the previous day for each of 10 days. Calculate overall percentage change for 5 days. 8. Write a report (2 pages double-spaced) about the results you have received. a) How do the behaviors of the value-weighted, price-weighted, and unweighted indexes compare over the 5 days? b) Compare the performance during the time frame of your price-weighted stock index with the Dow Jones Industrial Average and your value-weighted index with the S&P 500 and the NASDAQ Composite. Project Part 3 (25%) Based on the course material presented in chapter 8 Calculate beta coefficient - International Business Machines Corp. (IBM) You want to evaluate the recent investment performance for International Business Machines Corp. (IBM) – relative to the S&P500 index. a. Go to www.cnn.money.com . In the window “Get quote” type IBM. Click “Historical quotes” on the left side of the window. Download daily price information for the past one month for IBM. b. Go to www.cnn.money.com . In the window “Get quote” type SPX (Symbol for the S&P 500 Index). Click “Historical quotes” on the left side of the window. Download daily price information for the past one month for S&P500. c. Calculate daily returns that correspond to these daily prices for IBM as well as for S$P500. d. Using daily returns for the past month, calculate the beta coefficient for IBM compared to the S&P 500. (Note: You can either build your own spreadsheet model to perform these calculations or use Excel’s build-in functions for “Slope” or Regression.”). You must present your work in an Excel file. e. Go to http://finance.yahoo.com Click on “Key statistics”. Find the beta coefficient for IBM. Compare with the result that you received for beta coefficient in part (d). f. Apply the Capital Asset Pricing Model (CAPM) Security Market Line to estimate the required return on IBM stock a. 1) using the beta coefficient that you calculated. b. 2) using beta coefficient found in “Key Statistics” on a financial site.. Assumptions and Data: Note that you will need an estimate of the risk-free rate, rRF, the market risk premium. Assume a 4% market risk premium and get the current yield on 10-year Treasury securities from Finance.Yahoo’s frontpage in the Market Summary (left side of page). g. Calculate the historical return over the month using the stock priced collected in part (a). h. Compare the historical return over the month found in part (g) against the required return, as found in part f. Is there a difference between these returns? Is this a problem? Why is there a difference? i. Write a 2 page report which contains the analysis of the results you have received. Project Part 5 (weight 20%) Based on the course material presented in chapter 20 Options strategies – CBOE.com An option is a contract which gives its holder the right to buy (or sell) an asset at some predetermined price within a specified period of time. The major advantage of options is their versatility, as they can serve a number of different investor needs. Options can be used to protect stock holdings from a decline in market prices, to increase income against a current stock holding, to position an investor for a big market move, or to benefit from a stock price rise without incurring the cost of buying the stock itself. Ultimately, an option’s most powerful function, if used correctly, is to hedge risk borne by the investor. This part of the project looks at the Chicago Board of Options Exchange (CBOE), where most options trading occurs, and examines the Option Strategies it describes. The CBOE home page can be found at (http://www.cboe.com). Access the “Equity Options” portion of the CBOE’s Strategies section. Write a report (2 pages double - spaced). In this essay address the following: 1. Select “Covered Calls” from the list of option strategies. What is a covered call? 2. What kind of investors should consider a covered call? 3. What is a protective put? 4. What kind of investors should consider a protective put? 5. What is a “naked” call? Is it high risk?

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