CHAPTER 20

# 17athebondvalueincreasestothepresentvalueoftheguarante

This preview shows page 1. Sign up to view the full content.

This is the end of the preview. Sign up to access the rest of the document.

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...
View Full Document

## This note was uploaded on 04/26/2013 for the course MATH 289Q taught by Professor Jamesbridgeman during the Fall '04 term at UConn.

Ask a homework question - tutors are online