Chapter17 - Chapter Seventeen Contemporary Issues Answers...

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Chapter Seventeen Contemporary Issues Answers to Problems and Questions 1. The primary reason LTCM collapsed was the use of too much leverage and the associated risk if security prices did not return to their historic relationship. Shortly before the collapse the firm’s leverage ratio was over 100 to 1. 2. From the historical set of prices, you can calculate returns over the recent past, and then determine the standard deviation of these returns. If you calculate VAR using a 95% confidence interval and one day, you would calculate the daily standard deviation, then form an interval 1.96 standard deviations above and below the current stock price. 3. The returns on the stock and the call option are obviously correlated. You could follow the same procedure as in Problem 2 to find the stock values. Then use Black-Scholes to find the theoretical call value at both the upper and lower stock prices. Subtracting the call value from the stock value gives the range of covered call “portfolio” values. 4. Individual response.
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Chapter17 - Chapter Seventeen Contemporary Issues Answers...

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