Questions from Corporate Finance

Q: Consider a perpetual put option with S = $50, K

Consider a perpetual put option with S = $50, K = $60, r = 0.06, σ = 0.40, and δ = 0.03. a. What is the price of the option and at what stock price should it be exercised? b. Suppose δ = 0.04 with all...

Q: XYZ Corp. compensates executives with 10-year European call options

XYZ Corp. compensates executives with 10-year European call options, granted at the money. If there is a significant drop in the share price, the company’s board will reset the strike price of the opt...

Q: Consider the June 165, 170, and 175 call option prices

Consider the June 165, 170, and 175 call option prices in Table 9.1. a. Does convexity hold if you buy a butterfly spread, buying at the ask price and selling at the bid? b. Does convexity hold if yo...

Q: Suppose that the exchange rate is 1 dollar for 120 yen.

Suppose that the exchange rate is 1 dollar for 120 yen. The dollar interest rate is 5% (continuously compounded) and the yen rate is 1% (continuously compounded). Consider an at-the-money American dol...

Q: Construct an asymmetric butterfly using the 950-, 1020-, and 1050

Construct an asymmetric butterfly using the 950-, 1020-, and 1050-strike options. How many of each option do you hold? Draw a profit diagram for the position.

Q: Use Itˆo’s Lemma to evaluate d(√S). For the

Use Itˆo’s Lemma to evaluate d(√S). For the following four problems, use Itˆo’s Lemma to determine the process followed by t...

Q: You have purchased a 40-strike call with 91 days to

You have purchased a 40-strike call with 91 days to expiration. You wish to delta-hedge, but you are also concerned about changes in volatility; thus, you want to vega-hedge your position as well. a....

Q: XYZ wants to hedge against depreciations of the euro and is also

XYZ wants to hedge against depreciations of the euro and is also concerned about the price of oil, which is a significant component of XYZ’s costs. However, there is a positive correlation between the...

Q: Suppose that S = $100, σ = 30%, r

Suppose that S = $100, σ = 30%, r = 6%, t = 1, and δ = 0. XYZ writes a European put option on one share with strike price K = $90. a. Construct a two-period binomial tree for the stock and price the p...

Q: Using the CEV option pricing model, set β = 1and generate

Using the CEV option pricing model, set β = 1and generate option prices for strikes from 60 to 140, in increments of 5, for times to maturity of 0.25, 0.5, 1.0, and 2.0. Plot the resulting...