1. Bank of Detroit has estimated that its 1 million euro position is subject to market risk. The spot exchange rate is €1=$1.25. Over the past six months, the spot exchange rate has a mean 3 basis points and a standard deviation 60 basis points. Determine the bank's DEAR for this € position using a 99 percent confidence level.
2. You are considering buying 1,000 shares of common stock in Smith Industries, which produces footballs. You need an annual return of 10% to justify the purchase. According to financial reports, the company is expected to pay annual dividends of $1.95 one year from today, $2.60 two years from today, and $3.27 three years from today. After the third year, dividends will increase at a constant annual rate of 4% forever. If you buy the stock today, how much would you be willing to pay per share?