Math 225

September 15, 2004

Homework 3 (Due 9/20/04)

For problems 1, 2, and 3, assume the following present value curve:

t 0 0.5 1 1.5 2 2.5 3

P(t) 1.000 0.990 0.980 0.969 0.957 0.946 0.934

1. You are offered an opportunity to invest $100 in an enterprise that will pay certain guaranteed amounts over the next three years. The cash flow stream is as follows:

time payment

(years) (dollars)

0 –100

1 +30

2 +40

3 +40

Is this a good investment ?

2. We defined flat dollars as follows:

A flat dollar, delivered at time t, is the same as (1/P(t)) ordinary dollars.

The following statement describes a contract made in ordinary dollars. Using the given present value curve, translate it into a statement using flat dollars.

“ I pay you $2.80 today. Six months from now, if the share price S

of MDT is above K = $50.00, then you pay me the excess, S – K. ”

3. If the present value curve is as above, what is ?

4. Follow the steps of the “DOWNLOADING…” handout from Monday. Work with a group if you like, but pick one company for each student.

a. Symbol for your company: ___________

b. If you worked with others, what were their company symbols? ______________

c. Time period for prices you downloaded: _______________ to _______________

d. Largest absolute value of R(t) (logarithmically-defined daily return) you found

during this period: ____________________

e. Mean (average) of the R(t) values: __________________

f. If you computed the standard deviation of the R(t) values, what was it ? ___________

(end)