CHAPTER 20

17athebondvalueincreasestothepresentvalueoftheguarante

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Unformatted text preview: nt value of the exercise price. b. Again we rearrange the put­call parity relationship: PV(EX) = Value of put ­ Value of call + Share price This implies that, in order to replicate the payoffs of a bond, you buy a put, sell a call, and buy the stock. 14. a. Use the put­call parity relationship for European options: Value of call + Present value of exercise price = Value of put + Share price Solve for the value of the put: Value of put = Value of call + PV(EX) ­ Share price Thus, to replicate the payoffs for the put, you would buy a 26­week call with an exercise price of $100, invest the present value of the exercise price in a 26­week risk­free security, and sell the stock short. b. Using the put­call parity relationship, the European put will sell for: 8 + (100/1.05) ­ 90 = $13.24 15. a. From the put­call parity relationship: Value of call + Present value of exercise price = Value of put + Share price Equity + PV(Debt, at risk­free rate) = Default option + Assets $250 + $350 = $70 + $530...
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