Questions from Corporate Finance

Q: Verify that when there are transaction costs, the lower no-

Verify that when there are transaction costs, the lower no-arbitrage bound is given by equation (5.12).

Q: As in the previous problem, consider holding a 3-year

As in the previous problem, consider holding a 3-year bond for 2 years. Now suppose that interest rates can change, but that at time 0 the rates in Table 7.1 prevail. What transactions could you under...

Q: Using the zero-coupon bond yields in Table 8.9

Using the zero-coupon bond yields in Table 8.9, what is the fixed rate in a 4-quarter interest rate swap? What is the fixed rate in an 8-quarter interest rate swap?

Q: In the following, suppose that neither stock pays a dividend.

In the following, suppose that neither stock pays a dividend. a. Suppose you have a call option that permits you to receive one share of Apple by giving up one share of AOL. In what circumstance might...

Q: Let S = $40, K = $40, r

Let S = $40, K = $40, r = 8% (continuously compounded), σ = 30%, δ = 0, T =0.5 year, and n = 2. a. Construct the binomial tree for the stock. What are u and d? b. Show that the call price is $4.110. c...

Q: We sawin Section 10.1 that the undiscounted risk-neutral

We sawin Section 10.1 that the undiscounted risk-neutral expected stock price equals the forward price. We will verify this using the binomial tree in Figure 11.4. a. Using S = $100, r = 0.08, and &Ic...

Q: Consider a bull spread where you buy a 40-strike call

Consider a bull spread where you buy a 40-strike call and sell a 45-strike call. Suppose σ = 0.30, r = 0.08, δ = 0, and T = 0.5. a. Suppose S = $40. What are delta, gamma, vega, theta, and rho? b. Sup...

Q: Consider a put for which T = 0.5 and K

Consider a put for which T = 0.5 and K = $45. Compute the Greeks and verify that equation (13.9) is zero.

Q: Using the information in the previous problem, compute the prices of

Using the information in the previous problem, compute the prices of a. An Asian arithmetic average strike call. b. An Asian geometric average strike call. Previous Problem Suppose that S = $100, K =...

Q: Problem 12.11 showed how to compute approximate Greek measures for

Problem 12.11 showed how to compute approximate Greek measures for an option. Use this technique to compute delta for the gap option in Figure 14.3, for stock prices ranging from $90 to $110 and for t...