M12_MCDO8122_01_ISM_C12

M12_MCDO8122_01_ISM_C12 - Chapter 12 Financial Engineering...

Info iconThis preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: Chapter 12 Financial Engineering and Security Design n Question 12.1 Let 06 . R e . = The present value of the dividends is 1 2 3 4 5 (1 50) 2 (2 50) 3 8 1317 R R R R R----- + . + + . + = . . The note originally sells for 100 8 1317 91 868.- . = . With the 50 cent permanent increase, the present value of dividends rises by 1 2 3 4 5 2.0957 2 R R R R R----- + + + + = to 10.2274, leading the note value to fall to100 10 2274 89 773.- . = . n Question 12.2 For this problem, let 1 1 03 . B . = 1. The prepaid forward price is 015 3 1200 1147 20. T S e e --. = = . 2. We have to solve the coupon, c , that solves 6 1 52 8 1147 20 1200 9 7467 5 4172 i i c B c = . + . = = = . . . 3. The prepaid forward price for 1 share at time t is 015 1200 ; P t t F e-. = for each semi-annual share, we can write the relevant prepaid forward price as 1200 D i where 015 2 . D e-. / = With this formulation we have a similar analysis for the fractional shares, c * : 6 * * 1 52 8 1200 1147 20 1200 007528 shares. 1200 5 845 i i c D c = . + . = = = . . To interpret, we will receive 007528 . units of the index every six months. This has a current value of 1200 ( 007528) 9 0336. . = . We could quote c * in dollars ($9.0336) instead of units. 146 McDonald Fundamentals of Derivatives Markets n Question 12.3 1. This is the two-year prepaid forward price: 015(2) 1200 1164 5. T S e e --. = = . 2. As in Equation (12.5), 015(2) 8 1 1200(1 ) 4 762 7 4475 i P T t i S F e c P-. =-- = = = . . . 3. As in the Problem 12.2c, letting 015 4 , D e-. / = 8 8 * 8 * 8 1 1 1 1200 1200 1200 003757 shares, i i i i D c D D c D = =- + = = = . which is currently worth ( 29 003757 $1200 $4 5084. . = . n Question 12.4 The relevant two-year interest rate is ln(1 8763) 2 6 6023%. /. / = . 1. The embedded option is worth 247.91. The prepaid forward is worth 015(2) 1200 1164 53. e-. = . The bond price is worth the sum 1164 53 247 91 1412 44 . + . = . . 2. must solve 1164 53 247 91 1200 35 47 247 91 1431. . + . = = . / . = . n Question 12.5 As in the previous question, we use 6 6023%. r = . 1. The embedded option is worth 247.91. The bond price is worth 1200 ( 8763) 247 91 1299 47 . + . = . . 2. must solve 1200 ( 8763) 247 88 1200 59884. . + . = = . n Question 12.6 We continue to use 6.6023% as the relevant two-year interest rate. 1. The out-of-the-money option (i.e., K = 1500) is worth 141.56, making the bond have a value of 1164 53 247 91 141 56 1270 89. . + .- . = ....
View Full Document

Page1 / 8

M12_MCDO8122_01_ISM_C12 - Chapter 12 Financial Engineering...

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online