solution-to-last-three-questions

solution-to-last-three-questions - Solution to the last...

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Solution to the last three questions Question 39 Year 0 1 2 3 revenue 1000 1000 1000 cost 500 500 500 depreceation 600 600 600 working capital 100 100 100 Cash flows from Operations 530 530 530 Cash flows from the change of working capital -100 0 0 Cash flows from capital investment -3000 Free cash flows -3000 430 530 530 PV -3000 373.91 400.76 348.48 NPV -1267.08 When I calculate the cash flows from the operations, I use the third formula discussed in the lecture. That is, cash flows from opearations = (Reven Question 40 (a) Use two-period binomial tree Each period is three month. So rf = 4%/4 =1% and Rf =1 Sigma =0.25, h =1/4 =0.25 year u =exp(sigma*sqrt(h))=exp(0.25*sqrt(0.25))= 1.13 d=1/u = 0.88 The risk-neutral probability for up is p=(Rf-d)/(u-d)=(1.01-0.883)/(1.133 We have three states in period 2: uu, ud, dd In uu, S2= 100*1.133*1.133 = 128.4 in sd, S2 = 100*0.883*1.133= 100 in dd, S2 =100*0.883*0.883 = 78 , where S2 Remember we exercise the option in period 2. So the ex where Cuu=Cud=0, Cdd = max( 100 -78,0)=2 So, the price of the Put option is (b) Your uncle's deal Let S1 be the stock price for IBM one year later.
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