Questions from Corporate Finance

Q: Using the CEV option pricing model, set β = 3 and

Using the CEV option pricing model, set β = 3 and 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 implied vo...

Q: Compute estimated profit in 1 year if Telco buys a call option

Compute estimated profit in 1 year if Telco buys a call option with a strike of $0.95, $1.00, or $1.05. Draw a graph of profit in each case.

Q: Using Monte Carlo, simulate the process dr = a(b

Using Monte Carlo, simulate the process dr = a(b − r)dt + σ
, assuming that r = 6%, a = 0.2, b = 0.08, φ = 0 and σ = 0.02. Compute the prices of 1-, 2-, and 3-year zero coupon bonds, and verify that y...

Q: Use the same assumptions as in the preceding problem, without the

Use the same assumptions as in the preceding problem, without the bid-ask spread. Suppose that we want to construct a paylater strategy using a ratio spread. Instead of buying a 440-strike call, Auric...

Q: A collect-on-delivery call (COD) costs zero

A collect-on-delivery call (COD) costs zero initially, with the payoff at expiration being 0 if S

Q: Let S = $40, σ = 0.30,

Let S = $40, σ = 0.30, r = 0.08, T = 1, and δ = 0. Also let Q = $60, σQ= 0.50,δQ= 0, and ρ = 0.5. In this problem we will compute prices of exchange calls with S as the price of the underlying asset a...

Q: Here is a quote from an investment website about an investment strategy

Here is a quote from an investment website about an investment strategy using options: One strategy investors are applying to the XYZ options is using “synthetic stock.”Asynthetic stock is created whe...

Q: Consider the following two bonds which make semiannual coupon payments: a

Consider the following two bonds which make semiannual coupon payments: a 20- year bond with a 6% coupon and 20% yield, and a 30-year bond with a 6% coupon and a 20% yield. a. For each bond, compute t...

Q: For a stock index, S = $100, σ =

For a stock index, S = $100, σ = 30%, r = 5%, δ = 3%, and T = 3. Let n = 3. a. What is the price of a European call option with a strike of $95? b. What is the price of a European put option with a st...

Q: In this problem we consider whether parity is violated by any of

In this problem we consider whether parity is violated by any of the option prices in Table 9.1. Suppose that you buy at the ask and sell at the bid, and that your continuously compounded lending r...