Questions from Corporate Finance

Q: Suppose that you buy the S&R index for $1000

Suppose that you buy the S&R index for $1000, buy a 1000-strike put, and borrow $980.39. Perform a payoff and profit calculation mimicking Table 3.1. Graph the resulting payoff and profit diagrams...

Q: Use Itˆo’s Lemma to evaluate d[ln(S)].

Use Itˆo’s Lemma to evaluate d[ln(S)]. For the following four problems, use Itˆo’s Lemma to determine the process followed by the specified eq...

Q: Repeat the previous problem, only use Monte Carlo simulation.

Repeat the previous problem, only use Monte Carlo simulation. Repeat the previous problem Using the delta-approximation method and assuming a $10m investment in stock A, compute the 95% and 99% 1-, 1...

Q: Suppose that you short the S&R index for $1000

Suppose that you short the S&R index for $1000 and sell a 1000-strike put. Construct a table mimicking Table 3.1 that summarizes the payoff and profit of this position. Verify that your table matc...

Q: The current price of oil is $32.00 per barrel

The current price of oil is $32.00 per barrel. Forward prices for 3, 6, 9, and 12 months are $31.37, $30.75, $30.14, and $29.54. Assuming a 2% continuously compounded annual risk-free rate, what is th...

Q: Suppose you buy theS&Rindex for $1000 and buy a

Suppose you buy theS&Rindex for $1000 and buy a 950-strike put. Construct payoff and profit diagrams for this position. Verify that you obtain the same payoff and profit diagram by investing $931.37 i...

Q: Given a continuously compounded risk-free rate of 3% annually

Given a continuously compounded risk-free rate of 3% annually, at what lease rate will forward prices equal the current commodity price? (Recall the copper example in Section 6.3.) If the lease rate w...

Q: The firm has a single outstanding debt issue with a promised maturity

The firm has a single outstanding debt issue with a promised maturity payment of $120 in 5 years. What is the probability of bankruptcy? What is the credit spread?

Q: Suppose the premium on a 6-month S&R call

Suppose the premium on a 6-month S&R call is $109.20 and the premium on a put with the same strike price is $60.18. What is the strike price?

Q: Repeat the previous problem, assuming that the dividend yield is 1

Repeat the previous problem, assuming that the dividend yield is 1.5%. Previous Problem Suppose you are a market-maker in S&R index forward contracts. The S&R index spot price is 1100, the risk-free...