Chapter15 - Chapter Fifteen Other Derivative Assets Answers...

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Chapter Fifteen Other Derivative Assets Answers to Problems and Questions 1. At-the-money puts and calls should sell for the same price. 2. Warrants sell for their greatest premium over intrinsic value when they are at-the-money. This is as predicted by Black-Scholes. 3. If you buy when-issued stock, you enjoy a delay between the time you establish the investment position and the time when you have to pay for your investment. It does appear, however, that when-issued prices are higher than the time value of money adjustment indicates they should be, meaning that when-issued shares are too expensive relative to regular-way shares. 4. a) In the cases where this has happened, “warrant holder goodwill” has been cited as the reason. In a sense, extension of the life of the warrants appears to be not in the best interest of the shareholders of the firm. If the warrants are simply allowed to expire, this “undilutes” earnings per share and removes a contingent liability from the books. Presumably the firm feels that the benefit from the goodwill overrides the accounting benefits. An alternate view is that the warrants will eventually become a source of capital, but only if they remain outstanding long enough to go in-the-money. Extending them increases the likelihood that the firm will eventually receive this capital inflow. b) If the warrant’s life is extended, this instantly increases its value, which is not advantageous to the warrant hedger. This would either reduce or delay the hedger’s profit. 5. Probably the single most important advantage is the fact that no futures
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This note was uploaded on 01/31/2011 for the course ACCT 331 taught by Professor N/a during the Spring '10 term at Mountain State.

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Chapter15 - Chapter Fifteen Other Derivative Assets Answers...

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