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Investment Essay

2239 words - 9 pages

Problem 1

a. How is Dow Jones index computed? Write 1 paragraph on the history of when the Dow
Jones Index was first initiated.
Computation Method: Dow Jones is a price-weighted index. So, to calculate the DJIA, the sum of the prices of all 30 stocks is divided by a devisor which is named the Dow Divisor. The divisor is adjusted in case of stock splits, spinoffs or similar structural changes, to ensure that such events do not in themselves alter the numerical value of the DJIA. Early on, the initial divisor was composed of the original number of component companies; which made the DJIA at first, a simple arithmetic average. The present divisor, after many adjustments, is less than ...view middle of the document...

It was a revolutionary idea at the time, but its implementation was simple. The averages were, well, plain old averages. To calculate the first average, Dow added up the stock prices and divided by 11 - the number of stocks included in the index.
Today, the DJIA is a benchmark that tracks American stocks that are considered to be the leaders of the economy and are on the Nasdaq and NYSE. The DJIA covers 30 large-cap companies, which are subjectively picked by the editors of the Wall Street Journal. Over the years, companies in the index have been changed to ensure the index stays current in its measure of the U.S. economy. In fact, of the initial companies included in the average, only General Electric remains as part of the modern-day average.
The changes won’t cause any disruption in the level of the Index. The divisor is used to offset the changes. Events like replacement oraddition in the list of the companies composing the index alter the sum of the component prices. In these cases, in order to avoid discontinuity in the index, the Dow Divisor is updated so that the quotations right before and after the event coincides:

Current Devisor (February 13, 2015): 0.15571590501117

Visa Inc. had four-for-one stock split that did not affect the overall value of the Dow Jones Industrial Average, .But the credit card company’s weighting in the blue-chip index dropped significantly, meaning other companies took the driver’s seat in steering the Dow.
That’s because the Dow is price-weighted index. Dow stocks with the highest prices have the largest impact. Visa had a 9.1% weighting in the Dow before split. That’s the most of any Dow component by a long shot. Goldman Sachs Group Inc.GS -0.41% had the second-heaviest weighting (and price) at 6.5%. After Visa’s four-for-one split, the share price dropped from $248 to $62, pushing Visa’s weight to 2.5%. That put it in the lower third of companies in the Dow. As a result, Goldman’s impact rose to 7%.

b. General Electric stock call-option with a strike price of $25 and with expiration date of January 15,2016 and strike price of 15.00 $ gives the holder right to purchase 100 share of general electric at price of 25.00$ on or before the expiration date.

C. Generally, It is a future contracts calls for delivery 1000 barrel Crude oil at a specified price( currently 69.63$ ) per barrel in February 2020.Details of delivery are as below:

Delivery shall be made free-on-board ("F.O.B.") at any pipeline or storage facility in Cushing, Oklahoma with pipeline access to Enterprise, Cushing storage or Enbridge, Cushing storage. Delivery shall be made in accordance with all applicable Federal executive orders and all applicable Federal, state and local laws and regulations.

At buyer's option, delivery shall be made by any of the following methods: (1) by interfacility transfer ("pumpover") into a designated pipeline or storage facility with access to seller's incoming pipeline or storage facility;...

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