Question1. What is arbitrage? In financial markets would you normally anticipate arbitrage opportunities to exist often? Why or why not? Would you anticipate the arbitrage opportunity go away quickly?
Question2. What is the differentiation between speculation and hedging? Why do business managers employ hedging strategies? Does hedging diminish company risk? How?
Question3. What is the differentiation between the spot and the forward markets? Why do investors or business managers require the forward markets?
Question4. Brandywine homecare, a not-for-profit business, had revenues of $12 million in 2004. Expenses but depreciation totalled 75% of revenues, and depreciation expenses were $1.5 million. All revenues were gathered in cash during the year and all expenses, but depreciation, were paid in cash.
Assume the company changed its depreciation computation procedures (Still in GAAP) such that its depreciation expense doubled. How would this affect Brandywine's income, total profit margin, and cash flow?
A) It would not change anything
B) It would double everything
C) Net income would be 0, Profit would be 0 and cash flow would be $3 million
D) Net income would be $3 million, profit would be 25% and cash flow would be zero