hw3_Derivatives-all

hw3_Derivatives-all - Contracts Shares Strike price Price...

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Contracts 6 Shares 600 Strike price 40 Price of Option 7 The Minimum cash investment: a) If the stock price is $38.00 18600 Assuming that the options have maturities of less than 9months b) If the stock price is $42.00 21000 c) If the contracts were naked, the Initial Margin if the stock price is $38.00 The greater of: $3,360.00 $2,280.00 The Initial margin requirement is therefore $3,360.00
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a.Express your position as an option on the value of the company. Since the value of the company is higher than the debt, we will pay off the debt. Much like a financial option, I can choose to pay off the debt and retain any left over value in the firm (the underlying asset) minus the debt payment. I also continue to manage the firm and receive personal income. Stock options, profit sharing, company stock and the like will also be retained. Much like a financial option, there is no obligation for me only the ability to decide to pay off the debt and continue operations. Since the value of the debt is higher than the value of the company, we will file bankruptcy. This would forfeit the value of the firm (the underlying asset) to the debtholders at a cost to me that is equivalent to my interests in becoming a manager. Stock options, profit sharing, company stock and the like will also be lost. I would have limited personal liability and the corporation would be fully liable. Much like a financial option, there is no obligation for me only the ability to file bankruptcy. This is similar to being long in a call or put position in the company. The downside risk for a manager is limited with unlimited upside potential based on assets (the company). This is also like being in a short position on the company because the capital has been raised and operations continue. Obligations are met or they file bankruptcy and the remaining assets must be given up. b.Express the position of the debtholders in terms of options on the value of the company. The debtholders have purchased a certain amount of risk in hopes of a promised return. If the company continues operations, they will see their return by year end with no further obligation. If the company files bankruptcy, the debtholders will take control of the company. This will create an obligation to run the company in hopes of receiving their return at some future date in excess of the original date or they can sell of the remaining assets, split the profits, and take a loss on the investment. This is similar to being in a long position in the company itself without options. The most that can be lost is the supplied capital with unlimited growth potential. c. What can you do to increase the value of your position The manager can increase the value of his position by obtaining stock in company if it continues operations giving him a greater claim on assets or liquidate the stock options and other benefits if bankruptcy is the only option. However, the latter is illegal.
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This note was uploaded on 12/14/2011 for the course FIN 5515 taught by Professor Staff during the Spring '10 term at FSU.

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hw3_Derivatives-all - Contracts Shares Strike price Price...

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