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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....
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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