Q: Suppose the yield curve is flat at 8%. Consider 3-
Suppose the yield curve is flat at 8%. Consider 3- and 6-year zero-coupon bonds. You buy one 3-year bond and sell an appropriate quantity of the 6-year bond to duration hedge the position. Any additio...
See AnswerQ: Repeat the previous problem, but this time for perpetual options.
Repeat the previous problem, but this time for perpetual options. What do you notice about the prices? What do you notice about the exercise barriers? Previous Problem Let S = $100, K = $90, σ = 30%,...
See AnswerQ: Consider a 5-year equity-linked note that pays one
Consider a 5-year equity-linked note that pays one share of XYZ at maturity. The price of XYZ today is $100, and XYZ is expected to pay its annual dividend of $1 at the end of this year, increasing by...
See AnswerQ: Suppose that S = $100, σ = 30%, r
Suppose that S = $100, σ = 30%, r = 8%, and δ = 0. Today you buy a contract which, 6 months from today, will give you one 3-month to expiration at-the-money call option. (This is called a forward star...
See AnswerQ: A DECS contract pays two shares if ST < 27.875
A DECS contract pays two shares if ST < 27.875, 1.667 shares if the price is above ST > 33.45, and $27.875 and $55.75 otherwise. The quarterly dividend is $0.87. Value this DECS assuming that S = $26....
See AnswerQ: Suppose that S = $50, K = $45,
Suppose that S = $50, K = $45, σ = 0.30, r = 0.08, and t = 1. The stock will pay a $4 dividend in exactly 3 months. Compute the price of European and American call options using a four-step binomial t...
See AnswerQ: The S&R index spot price is 1100, the risk
The S&R index spot price is 1100, the risk-free rate is 5%, and the continuous dividend yield on the index is 2%. a. Suppose you observe a 6-month forward price of 1120. What arbitrage would you under...
See AnswerQ: Use the Black-Scholes equation to verify the solution in Chapter
Use the Black-Scholes equation to verify the solution in Chapter 20, given by Proposition 20.3, for the value of a claim paying Sa.
See AnswerQ: Firm A has a stock price of $40, and has
Firm A has a stock price of $40, and has made an offer for firm B where A promises to pay 1.5 shares for each share of B, as long as A’s stock price remains between $35 and $45. If the price of A is b...
See AnswerQ: Repeat Problem 17.18 assuming that the volatility of gold is
Repeat Problem 17.18 assuming that the volatility of gold is 20% and that once opened, the mine can be costlessly shut down once, and then costlessly reopened once. What is the value of the mine? What...
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