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 price” 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?