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 $6 to $12 to $24 to $48 to $96 to $192 over a six-year time period. Over the same period, the value of the assets underlying the securities rose at an arithmetic rate from $6 to $9 to $12 to $15 to $18 to $21.
Instructions: Enter your answer as a whole number.

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 $12?

Answer 1

Answer:

When the value of existing financial securities rose from $6 to $192, the value of underlying assets rose from $6 to $21. It is also known these patterns hold as much for increases as for decreases. Notice that the original value of both the existing financial securities and underlying assets is $6.

Explanation:

Now, there occurs a $12 fall in the underlying assets. This means the value of underlying assets falls from $21 to its original level of $9 (=$21 — $12), thereby causing the value of existing financial securities to also fall from $192 to its original level of $9. This means the value of the financial securities declines by $183 (= $192 — $9).