Questions from Business Statistics

Q: The value of a company’s equity is $4 million and the

The value of a company’s equity is $4 million and the volatility of its equity is 60%. The debt that will have to be repaid in 2 years is $15 million. The risk-free interest rate is 6% per annum. Use...

Q: A 5-year credit default swap requires a quarterly payment at

A 5-year credit default swap requires a quarterly payment at the rate of 60 basis points per year. The principal is $300 million and the credit default swap is settled in cash. A default occurs after...

Q: Assume that the hazard rate for a company is
and the

Assume that the hazard rate for a company is
and the recovery rate is R. The risk-free interest rate is 5% per annum. Default always occurs halfway through a year. The spread for a 5-year plain vani...

Q: Table 25.6 shows the 5-year iTraxx index was

Table 25.6 shows the 5-year iTraxx index was 77 basis points on January 31, 2008. Assume the risk-free rate is 5% for all maturities, the recovery rate is 40%, and payments are quarterly. Assume also...

Q: Explain how you would expect the returns offered on the various tranches

Explain how you would expect the returns offered on the various tranches in a synthetic CDO to change when the correlation between the bonds in the portfolio increases.

Q: Suppose that: (a) The yield on a 5

Suppose that: (a) The yield on a 5-year risk-free bond is 7%. (b) The yield on a 5-year corporate bond issued by company X is 9.5%. (c) A 5-year credit default swap providing insurance against company...

Q: In Example 25.3, what is the spread for

In Example 25.3, what is the spread for (a) a first-to-default CDS and (b) a second-to default CDS? //

Q: What is the value in dollars of a derivative that pays off

What is the value in dollars of a derivative that pays off £10,000 in 1 year provided that the dollar/sterling exchange rate is greater than 1.5000 at that time? The current exchange rate is 1.4800. T...

Q: Produce a formula for valuing a cliquet option where an amount Q

Produce a formula for valuing a cliquet option where an amount Q is invested to produce a payoff at the end of n periods. The return earned each period is the greater of the return on an index (exclud...

Q: Consider an up-and-out barrier call option on a

Consider an up-and-out barrier call option on a non-dividend-paying stock when the stock price is 50, the strike price is 50, the volatility is 30%, the risk-free rate is 5%, the time to maturity is 1...