1. As part of your effort to understand the
process of evaluating various elements of the financial marketplace, your
Financial Manager states that it may become important to take advantage of
arbitrage opportunities. You have been studying this aspect of the
financial marketplace and would like to review your understanding.
Describe what the term “arbitrage†means in the financial context; give an
example of “arbitrage opportunity†and then discuss how the “law of one priceâ€
would impact these opportunities.
2. Suppose you have an uncle who wishes to
make a gift of cash to you which will total $1,000,000. Your uncle has
asked you to tell him if you would rather have $1,000,000 in 5 years from today
or if you would rather have $200,000 at the beginning of each of the next 5
years beginning with January 1, 2014. You have just completed your study
of the time value of money and want to apply that concept to this
decision. How would you calculate the value of each of possible gift
amounts? What will you tell your uncle is your choice from these two
alternatives?
3. You wished to set-up an endowment to fund
an annual scholarship of $10000 from part of the funds your uncle is planning
to gift to you. If you can expect to earn 5% per year on investments and
you wish this scholarship to be provided forever, how much of the $1,000,000
gift must you invest?