CHAPTER 20

0511024isgreaterthantheright

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Unformatted text preview: issuing 10­percent bonds with $50 face value, Rectangular raises $50.93 cash (the present value, at 8 percent, of $55), which is used to repurchase stock. After the transaction, the market value balance sheet is the same as Circular’s. Shareholders have pocketed the $25.93 value of the government guarantee. 18. Answers here will vary according to the stock and the specific options selected, but all should exhibit properties very close to those predicted by the theory described in the chapter. 19. Imagine two stocks, each with a market price of $100. For each stock, you have an at­ the­money call option with an exercise price of $100. Stock A’s price now falls to $50 and Stock B’s rises to $150. The value of your portfolio of call options is now: V al ue Call on A 0 Call on B 50 Total $50 Now compare this with the value of an at­the­money call to buy a portfolio with equal holdings of A and B. Since the average change in the prices of the two stocks is zero, the call expires worthless. This is an example of a general rule:...
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This note was uploaded on 04/26/2013 for the course MATH 289Q taught by Professor Jamesbridgeman during the Fall '04 term at UConn.

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