Questions from Corporate Finance

Q: Suppose there is a single 5-year zero-coupon debt

Suppose there is a single 5-year zero-coupon debt issue with a maturity value of $120. The expected return on assets is 12%. What is the expected return on equity? The volatility of equity? What happe...

Q: You own one 45-strike call with 180 days to expiration

You own one 45-strike call with 180 days to expiration. Compute and graph the 1-day holding period profit if you delta- and gamma-hedge this position using a 40-strike call with 180 days to expiration...

Q: Consider the gap put in Figure 14.4. Using the

Consider the gap put in Figure 14.4. Using the technique in Problem 12.11, compute vega for this option at stock prices of $90, $95, $99, $101, $105, and $110, and for times to expiration of 1 week, 3...

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

Using the information in Table 15.5, suppose we have a bond that after 2 years pays one barrel of oil plus λ × max(0, S2 − 20.90), where S2 is the year-2 sp...

Q: Consider Panels B and D in Figure 16.4. Using

Consider Panels B and D in Figure 16.4. Using the information in each panel, compute the share price at each node for each bond issue.

Q: Verify in Figure 17.2 that if volatility were 30%

Verify in Figure 17.2 that if volatility were 30% instead of 50%, immediate exercise would be optimal.

Q: Refer to Table 19.1. a. Verify the

Refer to Table 19.1. a. Verify the regression coefficients in equation (19.12). b. Perform the analysis for t = 1, verifying that exercise is optimal on paths 4, 6, 7, and 8, and not on path 1.

Q: Warren Buffett stated in the 2009 Letter to Shareholders: “Our

Warren Buffett stated in the 2009 Letter to Shareholders: “Our derivatives dealings require our counterparties to make payments to us when contracts are initiated. Berkshire therefore always holds th...

Q: A European shout option is an option for which the payoff at

A European shout option is an option for which the payoff at expiration is max(0, S − K, G − K), where G is the price at which you shouted. (Suppose you have an XYZ shout call with a strike price of $...

Q: Explain why the VIX formula in equation (24.29)

Explain why the VIX formula in equation (24.29) overestimates implied volatility if options are American. The following three problems use the Merton jump formula. As a base case, assume S = $100, r =...