Exam #1



Exam #2

Econ 351

Spring 2016

Good Luck!

Name ______________________________________ Last 4 PSU ID __________

Please put the first two letters of your last name on the top right hand corner of this cover sheet. Also, ONLY NON-PROGRAMMABLE CALCULATORS ARE ALLOWED - THERE ARE NO SUBSTITUTES. THANKS FOR YOUR COOPERATION!

GOOD LUCK!!!

Total Points for exam = 280

Test time = 120 minutes

To help with time management if spreading time evenly

Question #1 = 40 points..... 17 minutes

Question #2 = 45 points ......19 minutes

Question #3 = 30 points.... 13 minutes

Question #4 = 40 points ....17 minutes

Question #5 = 35 points..... 15 minutes

Question #6 = 50 points.... 21 minutes

Question #7 = 40 points.... 17 minutes

1. (40 points)

1. (40 points) As we know, the FOMC recently met and we discussed what they did and didn't do. The Table below includes the reaction of selected interest rates the day before the FOMC announcement, Tuesday, March 15, and the day of the announcement, Wednesday, March 16. What we want to do in this problem is to explain why the rates changed as a result of the announcement. In particular, we are comparing interest rates on Tuesday, March 15 vs. rates on Wednesday, March 16. Please answer the questions below.

[pic]

a) (5 points) In general, what happened to the 1-year, 2-year, 3 year, 5 year, 7 year, and 10 year interest rates between and WHY between Tuesday, March 15 and Wednesday, March 16? What was the NEWS exactly? Be sure to support your answer and also, be sure to use an equation in your answer.

i3 = (i1 + i12e + i13e ) / 3 etc... any equation like this works. All rates fell since the Fed changed their forward guidance from raising the fed funds target range 4 times this calendar year to only raising the funds rate twice this year - so as the expected path of short rates fall, so do all the other rates since they are all determined by the expected path of interest rates.

b) (10 points) Now calculate what has happened to the one year interest rate expected one year from now between Tuesday, 3/15 and Wednesday, 3/16. Please show all work. Are your results consistent with your answer from part a)?

TWO YEAR

i2 = (i1 + i12e) / 2

Tuesday before......... .98 = (.71 + i12e) / 2 ............... i12e = 1.25%

Wednesday after....... .87 = (.66 + i12e) / 2 ............... i12e = 1.08%

YES! The expected one year rate expected one year from now has fallen from 1.25% to 1.08%

c) (10 points) Now calculate what has happened to the one year interest rate expected two years from now between Tuesday, 3/15 and Wednesday, 3/16. Please show all work. Are your results consistent with your answer from part a)?

3 YEAR

i3 = (i1 + i12e + i13e ) / 3

Tuesday before .............. 1.16 = (.71 + 1.25 + i13e) / 3 ............. i13e = 1.52%

Wednesday after ........... 1.05 = (.66 + 1.08 + i13e) / 3................. i13e = 1.41%

YES! The expected one year rate expected two years from now has fallen from 1.52% to 1.41%

The graphic below shows the reaction of the December 2016 federal funds futures contract to the FOMC announcement on Wednesday, March 16 and beyond.

[pic]

d) (5 points) What is the expected federal funds rate for December of 2016 rate at point A, the moment before the FOMC announcement? What is the expected federal funds rate for December of 2016 rate at point B, moments after the FOMC announcement?

100 - 99.29 = .71% (POINT A)

100 - 99.41 = .59% (POINT B)

e) (5 points) Shortly after the FOMC announcement, Janet Yellen held a press conference. Given the reaction to the FOMC announcement from point A to B, this December 2016 federal futures contract continues to rally. What was Janet Yellen talking about so that this rally in the December 2016 federal funds futures contract continued? Give two specific examples of what she said - we don't know for sure, just give two examples consistent with the continued rally in this December 2016 federal futures contract.

ANY DOVISH COMMENTS CONSISTENT WITH THE FED BEING WORRIES ABOUT ACHIEVING THEIR DUAL MANDATE - INFLATION BEING TOO LOW - GROWTH BEING TOO LOW - GEO - POLITICAL CONCERNS, BASICALLY TELLING EVERYONE THAT THE FED IS CONCERNED AND THUS, IS IN NO HURRY TO AGGRESSIVELY RAISE INTEREST RATES

f) (10 points) Suppose you work for CNBC as a reporter on markets and that the boss at CNBC told you to be prepared to comment on the reaction in the stock market given the NEWS from the FOMC statement. Suppose importantly that the boss got a hold of the FOMC statement beforehand and shared it with you. Since you are unsure of the (stock) market reaction you have to prepare a discussion of 1) why the stock market rose due to the announcement and 2) why the stock market fell on the announcement. Using the stock price determination formula explain why 1) the bullish reaction and 2) why the bearish reaction. Be sure to sound like a well informed financial analyst - as if you were on TV!

PV/#shares = SP = [exp earn 1 / 1 + i] + [exp earn 2 / (1 + i e ) 2] + [exp earn 3 / (1 + i e ) 3]...........

1) BULLISH...Since the FED is lowered the expected path of rates, the PV of future earnings rise so the market cap rises and along with it, stock prices.

2) BEARISH.... since the Fed is holding back on rate hikes, they are bearish on the economy so that people believe that expected earnings are now going to be lower pulling down the market cap and along with it, stock prices.

3) (30 points total)

a) (15 points) Explain the third reason why the Fed wanted to pay interest on reserves. Please be as specific as possible and use the balance sheet below and identify, by CLEARLY marking on the graph below, when the Fed got the authority to pay interest on reserves. Also locate on the graph the period of sterlization and be sure to explain what exactly sterilized intervention means.

[pic]

3) THE ECONOMY NEEDED A LOT OF LIQUIDITY AND THE FED WAS RUNNING OUT OF BALANCE SHEET CAPACITY - THEY USED UP 380 BILLION OF GS STERILIZING PREVIOUS INTERVENTIONS AND IT BECAME CLEAR THAT THEY WOULD RUN OUT OF BALANCE SHEET CAPACITY (NOT ENOUGH GS TO STERILIZE) THE AUTHORITY TO PAY INTEREST ON RESERVES GAVE THE FED UNLIMITED BALANCE SHEET CAPACITY AND THEY USED THAT UNLIMITED BALANCE SHEET CAPACITY IMMEDIATELY AND PUMPED TRILLIONS OF $ OF LIQUIDITY IN THE SYSTEM. THEY COULD DO THIS ONCE THEY GOT THE AUTHORITY SINCE THEY KNEW THE BANKS WOULD HOLD THE ER AND IT WOULD NOT ENTER INTO THE MULTIPLE DEPOSIT EXPANSION PROCESS (AND 'BLOW UP' THE MONEY SUPPLY).

b)(10 points total) Suppose you purchase one 3 year GS with a face value of $1000 and a coupon payment of 5 % when the yield on a 3 year GS is 3% in March 2017 (we are in the future!).

i) is the GS selling at a discount, a premium, or at par?

selling at a premium since the coupon rate is higher than the yield (5% vs. 3%)

ii) suppose one year passes and it is now March 2018. You have received one coupon payment and you decide to sell your bond which is now a 2 year GS. The yield on the 2 year GS is 1.00% in March of 2018 (the year was terrible economically and the Fed had to retreat from their tightening cycle) Calculate your rate of return showing all work.

|50 |1.03 |48.54 |

|50 |1.0609 |47.13 |

|50 |1.0927 |45.76 |

| | | |

| | | |

| | |915.14 |

| | |1056.57 |

| | | |

price of 3 year bond = $1,056.57..........collect $50 in coupon payment - then sell after one year

|50 |1.01 |49.50 |

|50 |1.0201 |49.01 |

| | | |

| | | |

| | | |

| | |980.30 |

| | |1078.81 |

price of 2 year bond = $1,078.81........

rate of return.............[(50 + 1078.81) - 1056.57] / 1056.57 = 6.84%

c) (10 points) Suppose you are bullish on bonds and you are going to make a bet right before the next scheduled FOMC meeting in April, 2016. Suppose you buy ten 3-year GS with a face value of $1000 when the yield on the 3 year GS is 1.5%. The coupon rate is 4%. The Fed makes their announcement and the yield on the 3-year GS falls to .75%. You immediately close your long position. Calculate your profit/loss and rate of return (since you only held the GS for a day, you did not receive any coupon payments)

return is 2.17%

4) (40 points) The table below contain some money supply data - we are going to compare and contrast the information in the last row of each table. All numbers are in billions of dollars except for the ratios and money multiplier (MM).

[pic]

[pic]

a) Let's return to September 2008 (2008-09-01). Recall that this was before the Fed obtained the authority to pay interest on reserves that happened in October of 2008. In the space below, draw a reserve market diagram depicting these conditions and label as point A. Assume that the Fed does perfect in terms of predicting reserve demand so that the actual funds rate is equal to its target rate = 2%. The discount rate was 2.25% in September of 2008.

[pic]

(10 points for correct and completely labeled diagram)

b) Let us update to September of 2010 (2010-09-01). As you know, the Fed 'hit' the 'zero bound' in December of 2008, where the official target for the federal funds rate was a range: 0% - .25% through December of 2015. In the space below, redraw the diagram as above with point A (from September 2008) and add a point B, that corresponds to the conditions in September 2010. Assume importantly and for simplicity, that the position of reserve demand remains constant from September 2008 to Septemebr 2010. Assume also that the actual funds rate is at its upper bound of the target range. The discount rate was set at .75% (75 basis points) in September 2010.

[pic]

(10 points for correct and completely labeled diagram)

c. (10 points) If the Fed wants to raise the federal funds rate to 2% like it was in September, 2008, what type and how many open market operations would they need to conduct? What are the implications on the economy if the Fed pursued such a strategy?

$ 945 BILLION OF OPEN MARKET SALES TO GET RESERVE SUPPLY BACK TO $103 BILLION. IF THEY DID THAT, BOND PRICES WOULD PLUMMET = YIELD ON BONDS WOULD SKYROCKET AND WITH IT, THE ECONOMY WOULD GET SLAMMED - NOT WHAT WE NEED IN THIS SLUGGISH RECOVERY.

d) (10 points) Given that the Fed preferred not to conduct the open market operations as above in part c), what else could they do to raise the federal funds rate to 2%. Be very specific and explain exactly how this 'alternative' policy would work in terms of influencing the federal funds rate and why. The word arbitrage needs to be in your answer. Assume zero transactions costs of arbitrage.

THEY WOULD RAISE THE IOR TO 2% THEREBY INCENTIVIZING BANKS TO BORROW FROM THE FEDERAL FUNDS MARKET (INFINITE DEMAND IF i ff < 2% AND EARN PROFITS BY EARNING THE HIGHER IOR = 2%. THE DEMAND FOR FF WOULD RISE AND WITH IT, THE FF RATE ITSELF - THIS AGAIN WOULD BE A CASE OF ARBITRAGE. THE BANKS WOULD ARBITRAGE THIS SPREAD AWAY UNTIL THERE WAS ZERO PROFITS BY CONDUCTING THIS ARBITRAGE. IF TRANSACTIONS COSTS WERE ZERO, THESE TWO RATES WOULD BE EQUAL.

5. (35 points) We discussed the important results from a research paper Eric Swanson on forward guidance.

a) (10 points) Fill in the blank below.

[pic]

The author of this paper argue that the FED could have done better in their forward guidance. Write an essay explaining how forward guidance is supposed to work in terms of influencing the economy and what the Fed should have done differently and why (according to the authors). Use the two graphics (below) to support your answer. That is, mark the period where the Fed achieved maximum 'bite' on their forward guidance as 'maximum bite' on both diagrams identifying the date and what the Fed did exactly to achieve this 'maximum bite.'

THE IDEA OF FORWARD GUIDANCE IS TO EXPLOIT THE PURE EXPECTATIONS THEORY (PET) OF THE TERM STRUCTURE THROUGH COMMUNICATION POLICY - TYPICALLY VIA THE FOMC STATEMENT. IF THE FED CAN KEEP EXPECTATIONS OF SHORT TERM INTEREST RATES LOW, THEN THIS WOULD ALSO LOWER LONGER RATES VIA PET. THE MAIN CONCLUSION IS THAT THE FED SHOULD HAVE PUT A DATE ON THEIR FORWARD GUIDANCE BECAUSE THAT IS WHEN THE FORWARD GUIDANCE HAD MAXIMUM BITE IN TERMS OF LOWERING AN STABILIZING THE EXPECTED PATH OF SHORT TERM INTEREST RATES. THEY SHOULD HAVE PUT A DATE ON IT EARLIER - AT OR NEAR THE TIME THE FED HIT THE ZERO BOUND IN DEC. 2008.

[pic]

[pic]

b) (10 points) Now explain how we can use the diagrams to identify the period of maximum bite. That is, on the first graph, how exactly can we tell, by viewing the graph, the period of maximum bite? Be sure to comment on the similarities or differences in the movement of the various interest rates before the period of maximum bite as well as during the period of maximum bite.

ON THE FIRST GRAPH, WE SEE THAT RATES FELL QUITE DRAMATICALLY AT THE TIME OF MAXIMUM BITE - THEY ALSO BECAME MORE STABLE, CONSISTENT WITH LOWERING AND SOLIDIFYING EXPECTATIONS OF LOW FUTURE SHORT TERM INTEREST RATES. THE FACT THAT THE RATES ALSO BECOME MORE STABLE SUGGESTS THAT THESE RATES ARE REACTING LESS TO NEWS - THIS IS THE PERIOD OF MAXIMUM BITE! BEFORE THIS PERIOD OF MAXIMUM BITE (08/11), RATES WERE HIGHER AND MORE VOLATILE.

c) (10 points) Similarly, using the second graphic, how can we identify the period of maximum bite in the Fed's forward guidance? Be sure to comment on what exactly the vertical axis represents in the second graph and how we should interpret it before the period of maximum bite as well as during the period of maximum bite. How does all of this relate to the pure expectations theory of the term structure (PET)?

THE VERTICAL AXIS REFERS THE SENSITIVITY COEFFICIENT OF THE INTEREST RATE TO NEWS. NORMAL REACTION TO NEWS IS DEFINED AS THE COEFFICIENT EQUALING ONE. IF THE SENSITIVITY PARAMETER IS ZERO, AS IT IS IN THE PERIOD OF MAXIMUM BITE, THEN THAT IMPLIES THAT THE INTEREST RATE IS COMPLETELY CONSTRAINED AS DEFINED BY ABSOLUTELY NO REACTION TO NEWS - THIS IS THE PERIOD OF MAXIMUM BITE - NO MATTER WHAT THE EMPLOYMENT REPORT IS, INFLATION REPORT, ETC, EXPECTATIONS OF FUTURE SHORT TERM REMAIN LOW AND CONSTANT.

d) (5 points) Let’s go back to question #1 on this exam - Given the lessons gleaned from this paper on forward guidance - did the Fed practice this lesson in their most previous FOMC statement on March 16, 2016? Why or why not?

YES! EVEN THOUGH THEY DID NOT CHANGE RATES, THE CHANGED THEIR PREVIOUS FG FROM RAISING RATES 4 TIMES THIS CALENDAR YEAR TO ONLY 2 TIMES THIS CALENDAR YEAR - OF COURSE THEY PUT AN EXPLICIT DATE ON THE FG!

6. Merck Problem. (50 points total) Pretend that you are hired by Merck to do some research on the behavior of their stock price. The CEO wants you to develop a report investigating two rumors that she has been hearing about Merck stock: 1) The behavior of Merck stock is consistent with the efficient market theory and 2) Changes in Merck stock, just like any other stock, are impossible to predict. That is, Merck stock follows a random walk.

In this problem, you are going to prepare the report. I will help!

To begin, I went to Yahoo finance and copied a picture depicting the behavior of Merck’s stock for the week of (10/31/05 – 11/04/05). I also went to the WSJ online and copied and pasted an excerpt from “Merck and Qualcomm Gain, But ImClone, Guidant Decline”

By KAREN TALLEY, DOW JONES NEWSWIRES November 4, 2005.

Excerpt

“Merck was the best percentage gainer among the Dow industrials, rising $1.07, or 3.8%, to $29.48. The drug maker scored a court victory in its second Vioxx liability case; thousands of cases lie ahead.”

Answer the following questions:

[pic]

a) (5 POINTS) To begin this “make believe” report (the CEO treasures completeness), explain exactly what determines stock prices. Write out our general formula of stock price determination, explaining exactly what each term means, and the intuition underlying the formula itself.

Now discuss some of the factors that could influence the terms of your expression above.

[pic]

FIRM SPECIFIC STUFF, LIKE IN THIS PROBLEM, MERCK WINNING COURT CASE

MACRO STUFF - EITHER ECONOMIC NEWS LIKE PAYROLL REPORTS, CC, ETC. AS WELL AS FED STUFF - CHANGES IN THE EXPECTED PATH OF RATES.

b) (5 POINTS) Now use your expression above to explain the movement in Merck stock on Thursday, November 3. Be specific as to the cause of the movement as well as well the movement itself, i.e., the duration.

THE EXPECTED EARNINGS OF THE FIRM, THE NUMERATOR(S) OF THE EQUATION ABOVE ARE ALL RISING SINCE LESS FINES EQUAL MORE PROFITS! THE MOVEMENTS, ACCORDING TO EMT, SHOULD BE IMMEDIATE.. THE LINE IS QUITE VERTICAL, CONSISTENT WITH EMT.

c) (5 POINTS) Use the expression in a) above to explain the behavior of Merck stock on Tuesday, November 1, the day the FOMC raised their target for the federal funds rate. Again, be very specific as to the cause of this behavior, using your expression in a). Below is an excerpt fromthe official statement from the 11/1 meeting.

[pic]

Release Date: November 1, 2005

For immediate release

The Federal Open Market Committee decided today to raise its target for the federal funds rate by 25 basis points to 4 percent.

Write your answer for part c) here.

MERCK STOCK DID NOTHING ON THIS DAY SINCE THE MOVE BY THE FED WAS ALREADY EXPECTED - THE EMT SUGGEST THAT THE ONLY REASON ASSET PRICES MOVE IS DUE TO NEWS, AND SINCE THERE WAS NO NEWS, THERE WAS NO MOVEMENT IN MERCK STOCK, CONSISTENT WITH EMT.

d) (10 POINTS) Are your results consistent with the efficient market theory? Begin your answer with explaining exactly what the efficient market theory is making sure you refer to the best investment advice assuming that markets are efficient. Apply your definition of the efficient market theory to your answers on both b) and c) above. Be very specific and be sure to use the term NEWS numerous times in your explanations.

THE EFFICIENT MARKET THEORY STATES THAT ASSET PRICES REFLECT ALL RELEVANT AND AVAILABLE INFORMATION IMMEDIATELY AND THAT THE ONLY REASON ASSET PRICES CHANGE IS DO TO THE UNEXPECTED, i.e., NEWS! THE MOVEMENT THURSDAY WAS CONSISTENT WITH THE IMMEDIATE REFLECTION OF THE NEWS AND ON TUESDAY, SINCE THERE WAS NO NEWS, THERE WAS NO MOVEMENT IN MERCK STOCK - BOTH INSTANCES OF COURSE ARE PERFECTLY CONSISTENT WITH EMT.

We now move on to addressing whether or not changes in Merck stock are predictable. Begin with a little notation. Let MRKt be the current spot price of Merck at time t (right now; today) and let MRKet+1 be the spot price of Merck expected tomorrow.

Of course the information set available to you is Ωt and includes all information, relevant or not, that is available up until time t (right now!).

e) (10 POINTS) According to the efficient market theory (along with our class discussion), what is the best forecasting model that you can come up with to predict MRKt+1 (the price of Merck stock tomorrow)? Be very specific and justify the choice of your forecasting model (i.e., justify why your model is the best of all the possible choices, being sure to identify some of the other possible forecasting models! (hint – redundant variables everywhere!!)).

BEST FORECASTING MODEL

[pic]

ALTERNATIVE MODEL

[pic]

THE BEST MODEL IS VERY SIMPLE - YET VERY POWERFUL - WE ONLY NEED TODAY'S MERCK PRICE SINCE ACCORDING TO EMT, THE CURRENT SPOT PRICE INCLUDES ALL THE RELEVANT AND AVAILABLE INFORMATION AVAILABLE NOW, AT TIME t, SO THAT ANY OTHER INFORMATION CONTAINED IN ANY VARIABLE AT TIME t, IS REDUNDANT (IT IS ALREADY CONTAINED IN THE SPOT).

f) (15 POINTS TOTAL, 5 FOR EACH EQUATION WITH SOLID ACCOMPANYING DISCUSSION) We are now ready to test whether or not Merck (stock) follows a random walk. Using the forecasting model above, explain exactly how we would test whether or not Merck follows a random walk. Be sure to identify the expected empirical results using all the equations that we set up in class. There are a minimum of three equations to set up and discuss. Be sure to continuously refer to the efficient market theory and the random walk properties of Merck throughout your discussion.

[pic]

FOR EQUATION 1, B HAS TO EQUAL 1 SO THAT WHEN WE SUBTRACT MRKt FROM BOTH SIDES WE SEE THAT CHANGES IN MERCK ARE DRIVEN PRIMARILY BY THE FORECAST ERROR (THE NEWS).

WE THEN TEST IF WE CAN PREDICT THE NEWS = CHANGE IN MERCK STOCK AS IN BEATING THE MARKET! IN EQUATIONS 2 AND 3 AND THE EXPECTED RESULTS ARE THAT THE REGRESSION RESULTS ARE HORRIBLE - R- SQUARED ABOUT ZERO T-STATS ALL LESS THAN 2 IMPLYING THAT IT IS IMPOSSIBLE TO BEAT THE MARKET, CONSISTENT WITH EMT!!!!

7. (55 points total)

In class, we discussed credit default swaps (CDS) and collateralized debt obligations (CDOs) in the context of the "Magnetar Trade."

a) (10 points) Referring to the picture below (this is from the video we watched in class), explain exactly how the Magnetar trade worked.

Please begin your answer here:

The Magnetar trade worked like this, first, Magnetar would purchase the equity portion of the CDO which is represented by the tray underneath the graphic in the graphic. Magnetar thus was the sponsor of the CDO since when you buy the riskiest portion of the CDO, you have the right to structure the CDO (the wine glasses). The idea is that the sponsor, Magnetar, would structure the CDO to make sure the wine glasses filled up and then, the last to get paid, the equity tray would fill up.

Contrary to this reasoning was the Magnetar trade. Magnetar would purchase large amounts of CDS which is simply a bet that the CDO would fail - an then structured it to make sure it would fail - they would lose on the equity portion of the CDO but win big on the CDS bet!

b) (5 points) We discussed the email communication between two rating analysts at Standard & Poors (see below):

– Rahul Dilip Shah: btw: that deal is ridiculous Shannon Mooney: I know right ... model def does not capture half of the risk

– Rahul Dilip Shah: we should not be rating it Shannon Mooney: we rate every deal

– Shannon Mooney: it could be structured by cows and we would rate it

How does "model def does not capture half of the risk" and "it could be structured by cows and we would rate it" apply to the Magnetar trade? Why did S&P rate every deal and who structured it like cows and why?

Apply the quotes: 'that deal is ridiculous' and 'it could be structured by cows' to the Magnetar trade.

The were rating CDOs that could have been structured by cows - so bad it was doomed to fail - ridiculous! These quotes are exactly consistent with the Magnetar trade!

c) (10 points) Using the two tables below, estimate the price of this 2 year Treasury coupon bond (the coupon rate is .75%) and show that it is quite close to the quote from stock trak.

[pic]

[pic]

[pic]

d) (10 points) The Stock Valeant International , a pharmaceutical company, has been getting hammered lately. Consider the excerpt below:

Valeant Pharmaceuticals, whose stock has fallen 62 percent this year amid U.S. investigations of its business and accounting practices, announced Monday that CEO Mike Pearson is leaving.

The expected earning stream for this firm, before the bad news regarding future profits, for the next three years is expected to be $70,000, $75,000, and $80,000 respectively (assume the firm falls off the face of the earth in three years as we did in class). Meanwhile, interest rates are expected to be 1 % for the next three years. Given 2,000 shares of existing stock, answer the following questions:

i) what is the stock price of this firm?

|70000 |1.01 |69306.93 |

|75000 |1.0201 |73522.2 |

|80000 |1.030301 |77647.21 |

| | |220476.3 |

P= $110.24

e) (10 points) Now the bad news hits and the expected earnings has fallen dramatically. The new expected earning stream for this firm for the next three years is expected to be $30,000, $30,000, and $25,000 respectively.

i) what is the stock price of this firm now?

|30000 |1.01 |29702.97 |

|30000 |1.0201 |29408.88 |

|25000 |1.030301 |24264.75 |

| | |83376.61 |

P= $41.69

f) (5 points) What is the percent change in the price of Valeant stock and is this percent change consistent with the excerpt above? Why or why not?

YES, THE % CHANGE IS NEGATIVE 62%!

g) (5 points) Suppose you found a put option for Valeant stock on the floor with a strike price of $100. Suppose also that the spot price at expiration is equal to the stock price you calculated above after the bad news. Is the put you found worth anything? Why or why not? If it is worth anything, please give be a specific number.

YES!!! IT IS $58.31 IN THE MONEY AND IS WORTH 100 X $58.31 = $5,831

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