This preview shows pages 1–2. Sign up to view the full content.
This preview has intentionally blurred sections. Sign up to view the full version.
View Full Document
Unformatted text preview: Introduction to derivatives, Fall 2011 BUSI 588, Case 13 solutions Solutions to Clinton chains 1. If we take on the project right now our profits are: = 10(200 5 P silver ) 450 = 10(200 5 30) 450 = 50 . 2. If we wait until next year, then our (uncertain) payoff is: 1 = max[10(200 5 P silver ) 450 , 0] . Notice the max() function: it reflects the fact that if the price of silver is too high, we abandon the project (and receive 0) rather than going ahead and incur a loss. Since we do not know how much silver will be worth in one year, how do we decide on when to invest? First, rewrite the payoff function as follows: 10(200 5 P silver ) 450 = 2000 50 P silver 450 = = 1550 50 P silver = 50 1550 50 P silver Thus, 1 = 50max(31 P silver , 0) Observe that the payoff function max(31 P silver , 0) is the payoff function of a put on silver with a strike price of $31, that expires in one year....
View
Full
Document
This note was uploaded on 11/25/2011 for the course BUSI 588 taught by Professor Staff during the Fall '10 term at UNC.
 Fall '10
 Staff
 Derivatives

Click to edit the document details