Unformatted text preview: xercise price. Since she gains 20% of all profits in excess of this level, it is comparable to a call option. Whether this provides
an adequate incentive depends on how achievable the $100 million threshold is and how
Ms. Cable evaluates her prospects of generating income greater than this amount. 10. a. The payoffs at expiration for the two options are shown in the following position
diagram: Taking into account the $100 that must be repaid at expiration, the
net payoffs are: b. Here we can use the putcall parity relationship: Value of call + Present value of exercise price = Value of put + Share price The value of Mr. Colleoni’s position is: Value of put (EX = 150) Value of put (EX = 50) PV (150 50) Using the putcall parity relationship, we find that this is equal to: Value of call (EX = 150) Value of call (EX = 50) Thus, one combination that gives Mr. Colleoni the same payoffs is: Buy a call with an exercise price of $150 Sell a call with an exercise price of $50 Similarly, another combination wi...
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- Fall '04
- Math, Exercise Price, 85, Mr. Colleoni, b. Bond