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Examen de Mesa I 2018
Examen de Mesa I 2018
Exercise 1
You have been hired as a financial advisor to Stephen Curry. He has received two offers for playing professional
basketball and wants to select the best offer, based on considerations of money only. Offer of the Lakers is a USD
180 million offer for USD 36 million a year for 5 years. Offer of the Golden State Warriors is a USD 200 million
offer of USD 20 million a year for four years and USD 120 million in year 5. What is your advice? (Hint: compare
the present value of each contract by assuming a range of interest rate, say 8% - 14%)
Exercise 2
MTV has 2 million dollars to invest in an outdoor concert "Tomorrow land". It is expected that the concert will
yield 6 million dollars on the 1 million investment, unless it rains. If it rains, the entire 2 million investment is lost.
There is a 50 % chance that it will rain on the day of the concert. However, MTV can buy rain insurance for 1
dollar on the 2 dollars. That is, for each 1 dollar of rain insurance, MTV will receive 2 dollars if it rains. The
organization can purchase as much rain insurance as desired up to a face value of 6 million dollars.
a) What is the expected rate of return on this investment if MTV buys “u” dollars of insurance?
b) How much insurance should be purchased to minimize the variance, and what is the associated expected return?