HW5sol - Solution to Problem Set 5 - FINA 4200 Spring 2010...

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Solution to Problem Set 5 - FINA 4200 Spring 2010 I. Multiple Choices 1. e 2. d 3. b 4. c 5. e 6. d 7. b 8. d 9. d 10. e 11. b 12. b 13. d 14. b 15. e 16. c 17. e 18. c 19. a 20. d 21. a 22. b 23. e 24. c 25. e 26. a 27. d 28. c 29. b 30. d Explanations to multiple choice questions 6. Note that equity is a call option where the underlying asset is the firm’s assets, and strike price is the firm’s debt. Therefore paying debt is like paying the exercise price to keep the firm’s assets (underlying asset). This is exercising the call option. 10. Intrinsic value = 29.03-27.50=1.53 11. This is a binomial model. Delta=(300-0)/(2300-1800)=0.6, Borrowing=0.6*1800/1.05=1028.58 Equity Value= Call Price = 0.6*2100 – 1028.58 =231.42 12. This is a binomial model. Delta=(400-0)/(2400-1800)=2/3, Borrowing=(2/3)*1800/1.06=1132.08 Equity Value= Call Price = (2/3)*1750-1132.08=34.59 13. Using put-call parity: Put Price = 1 + 40/1.0025 3 – 36 = 4.70 14. d2=0.6278 - 0.2*sqrt(0.5) = 0.4864 15-20. Plug in the following parameters in the Black-Scholes equation:
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This note was uploaded on 06/06/2011 for the course FINA 4200 taught by Professor Wu during the Spring '08 term at University of Georgia Athens.

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HW5sol - Solution to Problem Set 5 - FINA 4200 Spring 2010...

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