Question

Assume that securitization combined with borrowing and irrational exuberance in Hyperville have driven up the value of existing financial securities at a geometric rate, specifically from $2 to $4 to $8 to $16 to $32 to $64 over a six-year time period. Over the same period, the value of the assets underlying the securities rose at an arithmetic rate from $2 to $3 to $4 to $5 to $6 to $7.
If these patterns hold for decreases as well as for increases, by how much would the value of the financial securities decline if the value of the underlying asset suddenly and unexpectedly fell by $5? $___________.

Answer 1

Answer:

the value of the financial securities would fall by $62.

Explanation:

If the underlying assets which guarantee the securities decrease by $5 to $2.

And we assume the same ratios for the declining rate as the grow rate then it will generate the same price as when the assets were $2

At this levelthe financial securities were valued at $2

Therefore, the total decrease is for A(7) $64 - A(2)$2  = -$62

The financial securities decrease by 62 dollars

Answer 2

If the patterns depicted hold for both increases and decreases, the value of the financial securities would fall by $62.

Based on the information, the underlying assets which guarantee the securities reduce from $5 to $2, then it will generate the same price as when the assets were $2 such that the level of financial securities was valued at $2.

Therefore, the total decrease will then be gotten as;

= $64 - $2

= $62

Therefore, the financial securities will decrease by 62 dollars.

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