Questions from Corporate Finance

Q: Let t = 1. What is E (St |St

Let t = 1. What is E (St |St < $98)? What is E (St |St < $120)? How do both expectations change when you vary t from 0.05 to 5? Let σ = 0.1. Does either answer change? How?

Q: Compute estimated profit in 1 year if XYZ sells a call option

Compute estimated profit in 1 year if XYZ sells a call option with a strike of $0.95, $1.00, or $1.05. Draw a graph of profit in each case.

Q: Assume S0 = $100, r = 0.05,

Assume S0 = $100, r = 0.05, σ = 0.25, δ = 0, and T = 1. Use Monte Carlo valuation to compute the price of a claim that pays $1 if ST > $100, and 0 otherwise. (This is called a cash-or-nothing call an...

Q: Suppose that the processes for S1 and S2 are given by these

Suppose that the processes for S1 and S2 are given by these two equations:
Note that the diffusions dZ1 and dZ2 are different. In this problem we want to find the expected return on Q, αQ, where Q f...

Q: What is the value of a claim paying
? Check your answer

What is the value of a claim paying
? Check your answer using Proposition 20.4.
(20.4)

Q: Suppose there are 1-, 2-, and 3-year zero

Suppose there are 1-, 2-, and 3-year zero-coupon bonds, with prices given by P1, P2, and P3. The implied forward interest rate from year 1 to 2 is r0(1, 2) = P1/P2 − 1, and from year 2 to 3 is r0(2, 3...

Q: Suppose the stock price is $50, but that we plan

Suppose the stock price is $50, but that we plan to buy 100 shares if and when the stock reaches $45. Suppose further that σ = 0.3, r = 0.08, T − t = 1, and δ = 0. This is a noncancellable limit order...

Q: Verify that the 1-year forward rate 3 years hence in

Verify that the 1-year forward rate 3 years hence in Figure 25.5 is 14.0134%. For the next four problems, here are two BDT interest rate trees with effective annual interest rates at each node.

Q: Suppose you write a 1-year cash-or-nothing

Suppose you write a 1-year cash-or-nothing put with a strike of $50 and a 1-year cash-or-nothing call with a strike of $215, both on stock A. a. What is the 1-year 99% VaR for each option separately?...

Q: Suppose that in Figure 27.6 the tranches have promised payments

Suppose that in Figure 27.6 the tranches have promised payments of $160 (senior), $50 (mezzanine), and $90 (subordinated). Reproduce the table for this case, assuming zero default correlation.