Questions from Corporate Finance

Q: A $50 stock pays an 8% continuous dividend. The

A $50 stock pays an 8% continuous dividend. The continuously compounded risk free rate is 6%. a. What is the price of a prepaid forward contract that expires 1 year from today? b. What is the price of...

Q: The exchange rate is ¥95/=C, the yen-

The exchange rate is ¥95/=C, the yen-denominated interest rate is 1.5%, the euro-denominated interest rate is 3.5%, and the exchange rate volatility is 10%. a. What is the price of a 90-strike yen-den...

Q: Suppose you enter into a put ratio spread where you buy a

Suppose you enter into a put ratio spread where you buy a 45-strike put and sell two 40-strike puts, both with 91 days to expiration. Compute and graph the 1-day holding period profit if you delta- an...

Q: Consider the example of Auric. a. Suppose that Auric

Consider the example of Auric. a. Suppose that Auric insures against a price increase by purchasing a 440-strike call. Verify by drawing a profit diagram that simultaneously selling a 400- strike put...

Q: Repeat the previous problem for debt instead of equity. Previous

Repeat the previous problem for debt instead of equity. Previous Problem Suppose there is a single 5-year zero-coupon debt issue with a maturity value of $120. The expected return on assets is 12%. Wh...

Q: Suppose you invest in the S&R index for $1000

Suppose you invest in the S&R index for $1000, buy a 950-strike put, and sell a 1107- strike call. Draw a profit diagram for this position. How close is this to a zero-cost collar?

Q: If XYZ does nothing to manage copper price risk, what is

If XYZ does nothing to manage copper price risk, what is its profit 1 year from now, per pound of copper? If on the other hand XYZ sells forward its expected copper production, what is its estimated p...

Q: Again consider the widget investment problem in Section 17.1.

Again consider the widget investment problem in Section 17.1. Verify that with S = $50, K = $30, r = 0.04879, σ = 0, and δ = 0.009569, the perpetual call price is $30.597 and exercise optimally occurs...

Q: Swaps often contain caps or floors. In this problem, you

Swaps often contain caps or floors. In this problem, you are to construct an oil contract that has the following characteristics: The initial cost is zero. Then in each period, the buyer pays the mark...

Q: Heating degree-day and cooling degree-day futures contracts make

Heating degree-day and cooling degree-day futures contracts make payments based on whether the temperature is abnormally hot or cold. Explain why the following businesses might be interested in such a...