Questions from Corporate Finance

Q: a. Suppose that you want to borrow a widget beginning in

a. Suppose that you want to borrow a widget beginning in December of Year 0 and ending in March of Year 1. What payment will be required to make the transaction fair to both parties? b. Suppose that y...

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

Assume that the volatility of the S&P index is 30% and consider a bond with the payoff S2 + λ × [max (0, S2 − S0) – max (0, S2 − K)]. a. If λ = 1 and K = $1500, what is the price of the bond? b. Suppo...

Q: An option has a gold futures contract as the underlying asset.

An option has a gold futures contract as the underlying asset. The current 1-year gold futures price is $300/oz, the strike price is $290, the risk-free rate is 6%, volatility is 10%, and time to expi...

Q: The stock price of XYZ is $100. One million shares

The stock price of XYZ is $100. One million shares of XYZ (a negligible fraction of the shares outstanding) are buried on a tiny, otherwise worthless plot of land in a vault that would cost $50 millio...

Q: Suppose S0 = 100, r = 0.06, σS

Suppose S0 = 100, r = 0.06, σS= 0.4 and δ = 0. Use Monte Carlo to compute prices for claims that pay the following: a.
b.
c.

Q: Verify that e−r(T−t)N(

Verify that e−r(T−t)N(d2) satisfies the Black-Scholes equation.

Q: Use the answers to the previous two problems to verify that the

Use the answers to the previous two problems to verify that the Black-Scholes formula, equation (12.1), satisfies the Black-Scholes equation. Verify that the boundary condition V [S(T ), T ]= max[0, S...

Q: We now use Monte Carlo to simulate the behavior of the martingale

We now use Monte Carlo to simulate the behavior of the martingale Pt/St, with St as numeraire. Let x0 = P0(0, T )/S0. Simulate the process xt+h= (1+ σ√hZt+h)xt Let h be approximately 1 day. a. Evaluat...

Q: In the previous problem we saw that a ratio spread can have

In the previous problem we saw that a ratio spread can have zero initial premium. Can a bull spread or bear spread have zero initial premium? A butterfly spread? Why or why not? Previous Problem Comp...

Q: Verify that equation (23.14) (for both cases

Verify that equation (23.14) (for both cases K >H andK