7.Why do the vast majority of sophisticated option investors use combination strategies such as straps, strangles, straddles, collars, butterfly spreads, iron condors and iron butterflies? Pick one of these combination strategies and explain specifically how it works and why you would want to use it.
8.Name and describe three behaviors identified in behavioral finance that cause investors to make sub-optimal decisions.
9.To finance some manufacturing tools it needs for the next 3 years, Waldrop Corporation is considering a leasing arrangement. The tools are estimated to have a value of 10% of their original cost after 3 years. The firm will depreciate the cost of the tools on a straight-line basis over their 3-year life. The purchase price of the tools is $4,800,000 or the firm can make 3 equal end-of-year lease payments of $2,100,000 each and lease them. The firm’s tax rate is 40%. Annual maintenance costs associated with ownership are estimated at $240,000, but this cost would be borne by the lessor if it leases. What is the net advantage to leasing (NAL).
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