CHAPTER 20

Colleonithesamepayoffsis

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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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