1. Discuss the advantages and disadvantages to payback period and to return on investment (ROI) as analysis tools for making capital investment decisions. Which do you prefer and why?.
2. A call and a put option on the same non-dividend-paying stock, with the same $40 strike price, and with the same 1-year expiration date sell for $7.95 and $2.98 respectively. If the underlying stock price is $42, what is the no-arbitrage futures price for a one-year futures contract on the underlying stock?
3. What is the consequence of adverse selection and moral hazard problems for the market of borrowed funds?