Questions from Corporate Finance

Q: Using the information in Table 15.5, suppose we have

Using the information in Table 15.5, suppose we have a bond that pays one barrel of oil in 2 years. a. Suppose the bond pays a fractional barrel of oil as an interest payment after 1 year and after 2...

Q: Using the assumptions of Example 16.4, and the stock

Using the assumptions of Example 16.4, and the stock price derived in Example 16.5 suppose you were to perform a “naive” valuation of the convertible as a risk free...

Q: Consider the oil project with a single barrel, in which S

Consider the oil project with a single barrel, in which S = $15, r = 5%, δ = 4%, and X = $13.60. Suppose that, in addition, the land can be sold for the residual value of R = $1 after the barrel of oi...

Q: Assume that one stock follows the process dS/S =

Assume that one stock follows the process dS/S = αdt + σdZ (20.44) Another stock follows the process
(20.45) (Note that the σdZ terms for S and Q are identical.) Neither stock pays dividends. dq...

Q: An agricultural producer wishes to insure the value of a crop.

An agricultural producer wishes to insure the value of a crop. Let Q represent the quantity of production in bushels and S the price of a bushel. The insurance payoff is therefore Q(T ) × V [S(T ), T...

Q: Under the social security system in the United States, workers pay

Under the social security system in the United States, workers pay taxes and receive a monthly annuity after retirement. Some have argued that the United States should invest the social security tax p...

Q: For the lookback put: a. What is the value

For the lookback put: a. What is the value of a lookback put if St= 0? Verify that the formula gives you the same answer. b. Verify that at maturity the value of the put is

Q: Suppose S = $100, r = 8%, σ =

Suppose S = $100, r = 8%, σ = 30%, T = 1, and δ = 0. Use the Black-Scholes formula to generate call and put prices with the strikes ranging from $40 to $250, with increments of $5. Compute the implied...

Q: For years 2–5, compute the following: a

For years 2–5, compute the following: a. The forward interest rate, rf, for a forward rate agreement that settles at the time borrowing is repaid. That is, if you borrow at t − 1 at the 1-year rate ˜r...

Q: Assume that the volatility of the S&P index is 30

Assume that the volatility of the S&P index is 30%. a. What is the price of a bond that after 2 years pays S2 + max (0, S2 − S0)? b. Suppose the bond pays S2 + [λ × max (0, S2 − S0)]. For what λ will...